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, i.e. on the valuation, for tax purposes, of cross-border transactions between related parties. In respect of 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 its way to implement the anti-BEPS actions, including the Masterfile concept for transfer pricing documentations and the Country-byCountry reporting. Respective legislation will be adopted in Russia probably 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 TPissues in Russia, Ukraine, Poland, Kazakhstan and Belarus We will give you a short overview of the most used methods which are stipulated for determining the conformity of prices applied to controlled transactions to “arm’s length” prices:

Comparable market price / comparable uncontrolled price (CUP) method

This method is based on comparing the price applied during 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 which are 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 the application of the comparable market price method.

Resale price method

The resale price method is applied by performing a comparison of 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 shall 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 is implemented by comparing 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 to distinguish cases when, in the course of rendering the services, intangible assets are used which significantly influence the seller’s gross margin level. The cost plus method is largely used in Western Europe, where most tax authorities announced that a markup of 5-10% is usually accepted. Such statement is missing in Russia and Ukraine, so that a benchmark study is required. Furthermore the Russian and Ukrainian transfer pricing rules require for the application of the resale price method and the cost plus method that the accounting data of the related party and the non-related party are brought into a comparable format. As the details of such data of nonrelated parties are usually not available, 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 documentations in Russia and Ukraine. For the purposes of application of 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 is utilized by using a comparison of the actual split (distribution) of total profits gained 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 in the presence of a material interconnection of activities carried out by the parties to the transaction being analyzed (a group of homogeneous transactions being analyzed);
  • If the parties to the transaction being analyzed own rights to intangible assets that significantly influence the gross margin level.

The analysis of the profit split (distribution) between parties of the transaction being analyzed shall be made based on the proportion of the contribution of a party (to the transaction) to the total profit received by that party from the transaction pursuant to the following criteria or a combination thereof:

  • In proportion to their contribution to the total profit under the transaction being analyzed
  • In proportion to the split between the parties of the transaction being analyzed 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
General Director, Warsaw
+48 / 22 / 695 03 10
Alex Stolarsky
Director for Legal, Compliance and Tax
+7 / 495 / 956 55 57
Kirill Afanasyev
Director - Partner, Almaty, Astana, Aktau
+7 / 727 / 355 44 48
Sergey Odintsov
Head of Tax Department, Minsk
+375 / 17 / 290 25 57