The Russian Parliament and the President approved amendments to the Tax Code regarding transfer pricing rules on July 18, 2011, which will be applied from January 1, 2012 onwards.

This alert provides an overview of the new rules.

Hellevig, Klein & Usov provides, among others, the following services:

– Analysis of transfer pricing risks taking into account the new rules and recommendations to minimize such risks

– Development of transfer pricing strategy and recommendations on how to implement it;

– Advice to select and apply the appropriate transfer pricing methods;

– Support in preparing the necessary transfer pricing documentation;

– Conducting comparability analysis;

– Support in transfer pricing reporting;

– Support in tax disputes and tax audits;

– Support and advice on any other issues related to transfer pricing and taxes in general.

Should you have any questions regarding the new transfer pricing rules or other legal issues, please to contact us.

Avenir is now Awara – the holding company of which Hellevig, Klein & Usov is part has changed its name and is now known as Awara Group

Applicability (controlled transactions)

The new rules will put extra administrative burden, among others, on Russian companies trading with their foreign related companies. These amendments will affect international companies selling products to or buying products from their Russian subsidiaries and other related companies in Russia. Transfer pricing rules will apply to cross-border related-party transactions deriving income in the amount of RUR 100 and RUR 80 million in 2012 and 2013, respectively. Starting from 2014, all cross-border related-party transactions will be subject to transfer pricing rules.

By and large, the amendments to the Tax Code significantly narrow the sphere of transactions to which transfer pricing rules apply. Within Russia, transfer pricing rules will apply to related-party transactions only. According to the general rule, domestic related-party transactions are subject to transfer pricing rules only if the aggregate value of such transactions exceeds RUR 3 billion (RUR 2 billion in 2013; RUR 1 billion from 2014). Lower threshold values apply to certain domestic related-party transactions, such as, for instance, transactions involving an entity subject to unified tax on imputed income, in which case transfer pricing rules apply if the aggregate value of the transactions between the parties exceeds RUR 100 million.

In brief, cross-border related-party transactions are always subject to transfer pricing rules, while as a general rule, domestic related-party transactions are subject to transfer pricing rules only if the aggregate value of the transactions exceeds the above-referenced threshold values. 

Transfer pricing documentation 

Under the new rules, when taxpayers have cross-border related-party transactions, they are required to keep so-called transfer pricing documentation, but only if the aggregate revenue from controlled transactions exceeds RUR 100 million (RUR 80 million in 2013; from January 1, 2014 no threshold).

The rules do not set forth a specific form for the documentation, but regulates its content. Transfer pricing documentation should provide for, among other relevant information:

1)      The activities of the parties to such transactions;

2)      A list of the parties with which such transactions were executed;

3)      A description of the transaction, including the terms of the transaction, the method applied for determining the price, terms of payment, and other relevant information;

4)      A functional analysis clarifying the functions performed and risks assumed by the parties;

5)      The reason why a certain transfer pricing method is used;

6)      Sources of information;

7)      Information about received income and expenses incurred in a controlled transaction;

8)      Calculation of the arm’s length range (comparability analysis); and

9)      Information on any relevant tax adjustments made by the taxpayer, if any.

Please note that a transfer pricing policy is one of the key documents to justify prices. As a rule, this policy covers, among other things:

– the existing objective economic “commercial” conditions for the business a company;
– a description of risks associated with the business of a company;
– a description of factors affecting a company’s pricing;
– a procedure for assessing risks and other factors affecting a company’s pricing;
– a description of the markets in which a company operates and the characteristics allowing to demarcate between these markets;
– pricing methods, including bonuses and discounts;
– justification for the market nature of prices (including dependence on the terms of supply, the terms of payment, etc.)

The transfer pricing documentation should also provide for other information that affected the pricing of the transactions.

N.B.: It is recommended to start planning the process of complying with the new transfer pricing rules as early as possible. 

Comparability analysis

Comparability analysis is a key aspect of compliance with the new rules. Now it is important for taxpayers to conduct a comparability analysis justifying the prices that they apply. In the course of such analysis taxpayers have to collect and select information on internal and external comparable transactions (comparables). We strongly advise starting making comparability analysis at an early stage. 

Comparables mean transactions between non-related parties. A transaction may be qualified as a comparable after conducting a comparability analysis. A comparability analysis conducted under prescribed rules allows selecting comparables, which are most suitable for comparability analysis purposes. Comparables may be internal (in-house), transactions between the taxpayer and non-related parties; and external, transactions between third non-related parties. It is usually required to find at least four comparables; they may include internal comparables.

Main Steps

Conducting comparability analysis is a rather time-consuming and complicated process, which can be broken down in the following main steps:

1. Collecting and systemizing the necessary information about the taxpayer and its controlled transactions;

2. Analyzing the collected information for the purposes of comparability analysis, conducting functional analysis;

3. Determining the required comparability parameters;

4. Identifying sources of information on comparables that meet the defined comparability parameters;

5. Searching for and identifying comparables required for the analysis;

6. Collecting information on and selecting the comparables;

7. Analyzing the collected information on the selected comparables;

8. Conducting comparability analysis;

9. Making comparability adjustments, if necessary;

10. Establishing the arm’s length range;

11. Preparing a report on comparability analysis.

Factors to consider

Transactions comparable to controlled transactions must occur in similar commercial and/or financial conditions to those of controlled transactions.

The following factors should be considered to determine comparability of transactions:

1) Characteristics of goods (services) subject of transactions;

2) The functions performed by the parties to the transactions, including the characteristics of the assets used by the parties to the transaction, risks that they are taking and allocation of responsibilities between the parties, as well as other terms and conditions of transactions (functional analysis);

3) Terms and conditions of agreements (contracts) entered into between the parties affecting the price of goods (services);

4) Economic conditions of the parties to the transactions, including the characteristics of the markets for goods (services) affecting the price of goods (services);

5) Market (commercial) strategies of the parties to a transaction affecting the price of goods (services).

Information requirements

When conducting a comparability analysis, taxpayers should use:

  1. The information available at the time of execution of controlled transactions, but no later than December 31 of the calendar year in which the controlled transactions were executed; or
  2. Data of Russian accounting records for the three calendar years preceding the calendar year in which controlled transactions were executed; or
  3. Data of Russian accounting records for the three calendar years preceding the calendar year in which the prices for the controlled transactions were set.

Transfer pricing reporting

Under the new rules, taxpayers are required to provide tax authorities with reports on controlled transactions if the value of the transactions exceeds RUR 100 million (RUR 80 million in 2013; from January 1, 2014 no threshold) by May 20 of the following year. These reports should indicate the calendar year to which they refer, the subject of the transaction, information on the parties of the transactions, and revenue received from such transactions.

Tax authorities may request taxpayers to present the relevant transfer pricing documentation. Taxpayers are required to provide the documentation within 30 days from the date of such request, but tax authorities may not request this documentation before June 1 of the following year.  

Arm’s length range 

The previous transfer pricing rules provided for a price range within which applied prices are valid (safe harbor) as long as they do not deviate more than 20% from prices applied by independent parties on the market (arm’s length rule). The new rules abolish this range and require that prices applied in controlled transactions generally correspond to prices applied by independent parties on the market for comparable transactions. These new rules also introduce procedures for calculating the price range within which the price of goods and services should fall (arm’s length range).

To identify comparable transactions, a so-called functional analysis should be conducted and certain transfer pricing methods applied.

Related parties

Compared to the previous rules, the new transfer pricing rules expand the scope of related parties. According to the previous rules, related-party transactions arose when one of the parties to a transaction owned at least 20% of the charter capital of the other party or when the parties are individuals, with one party officially subordinated to the other, or are family relations.

In essence, according to the new rules, the following transactions are considered as related-party transactions:

1)      Transactions in which one of the parties own directly or indirectly more than 25% of the charter capital of the other party;

2)      Transactions between sister companies, if the mutual parent company owns more than 25% in both sister companies;

3)      Transactions between a company and a party authorized to appoint the general director or at least 50% of the members of its supervisory or management board;

4)      Transactions between companies of which the general director or at least 50% of their supervisory or management board have been appointed by the same party;

5)      Transactions between companies of which 50% of their supervisory or management board consists of the same individuals or their close relatives;

6)      Transactions between a company and its general director;

7)      Transactions between companies that have the same general director; and

8)      Transactions within company chains (including individuals) in which each company owns more than 50% of the charter capital in the following company.

As before, courts may on other grounds deem parties to a transaction as related parties, if the relationship between the parties is such that the other party can influence the other party’s decision-making.

Transfer pricing methods

The new transfer pricing rules increases the number of transfer pricing methods that can be applied to evaluate and determine the arm’s length range. The earlier hierarchy of methods is replaced with the best method principle which consists in selecting the most appropriate method to a specific situation, while the comparable uncontrolled price method generally remains the primary method. 

Comparable uncontrolled price (CUP) method 

The new rules provide that the CUP method is the primary method (except for trading companies that must apply resale minus method on a priority basis) for evaluating the appropriateness of applied prices. Applying the CUP method requires that there is at least one comparable transaction between independent parties on the market to which the transaction under review can be compared, as well as that sufficient information is available on that transaction. Transactions executed between the taxpayer and third parties may also be qualified as comparable transactions. 

Resale minus method 

The resale minus method may be used when goods acquired from a related-party are resold by the purchaser to a third party. The method allows determining whether the purchase price of the acquired goods conforms to market prices by comparing the gross margin of the purchaser (at resale) to gross margins in comparable transactions where resold goods have been acquired from an independent party. This is the primary method for trading companies. 

Cost plus method 

According to the new rules, the cost plus method is mainly applicable to services specified by law. This method allows comparing the gross profit on cost that the seller receives in a controlled transaction with the gross profit on cost received by a seller in comparable independent transactions and thus allows determining whether the applied price conforms to market prices.

Comparable profit method  

The comparable profit method should be used if there is not enough information available on comparable transactions to apply the resale minus or the cost plus method. Under the comparable profit method, the company’s operational profit is compared to the profit of companies in comparable transactions taking into consideration the company’s functions and risks, as well as the assets available.

Profit split method  

The profit split method should be used when the profit from a transaction is split between two or more parties, unless one of the above methods can be applied. This method is in particular applicable to transactions involving intellectual property rights. Profit should be split by the parties in proportion to their contributions to the transaction.

Sources of information

When conducting comparability analysis taxpayers, in addition to information about their own activities, may use any publicly available sources of information. Tax authorities are permitted to use the following sources of information for comparability analysis purposes:

1)      Prices and quotations on Russian and foreign trade exchanges;

2)      Customs statistics;

3)      Official information on prices published by government bodies or foreign governments or international organizations as well as information on prices available in other similar public databases;

4)      Information from agencies publishing information on prices;

5)      Companies’ internal information on comparable transactions;

6)      Companies’ financial and statistical reports;

7)      Information from independent appraisals.

In addition to the above, a company is allowed to use other information necessary for determining the market price as required by the applied transfer pricing method.

Transfer pricing audits

The new law authorizes tax authorities to conduct transfer pricing audits to control that taxes are duly paid. In general, such audits should not last more than six months, but tax authorities may extend such audits up to 21 months in certain cases.


Burden of proof

Although taxpayers are under documentation and reporting obligations, the burden of proof lies with tax authorities, and tax authorities must demonstrate that a price is not in line with prices applied on the market.


Symmetrical adjustments

If a party to a transaction has been imposed additional taxes due to the fact that it had not applied market prices, the other party to the transaction is entitled to adjust its taxes accordingly, i.e. in practice to decrease its taxes. Such symmetrical adjustments, however, apply to domestic transactions only.


Advance pricing agreements (APA)

The new transfer pricing law also introduces advance pricing agreements. An advance pricing agreement is entered into between a taxpayer and tax authorities. The subject-matter of an advance pricing agreement is the method for determining prices of controlled transactions. Advance pricing agreements are only available for so-called major taxpayers. A taxpayer must pay duties in the amount of RUR 1.5 million for consideration of an application for entering into an APA.


If the prices applied in controlled transactions do not conform to market prices, tax authorities may add to a taxpayer’s taxable income the revenue that the taxpayer would have earned if correct pricing would have been applied (tax adjustments).

From 2014 onwards, in addition to tax adjustments a special penalty of 20% will be imposed on taxpayers not applying market price rates. From 2017 onwards, this penalty will be increased to 40%, unless the breach relates to the financial years 2014-2016 in which case the 20% penalty rate will apply.    

Permanent establishments

The new rules also touch upon the taxation of permanent establishments of foreign legal entities in Russia and provide that the revenue of a permanent establishment should be determined taking into consideration the permanent establishment’s functions, assets and assumed risks.

Should you have any questions or require any further assistance regarding the new transfer pricing rules, please do not hesitate to contact us.

Artem Usov