Russian Govt Approves Draft Transfer Pricing Law

by Tatiana Smolenskaya, Tax-News.com, Moscow

16 November 2009

The Russian government has approved a draft law on transfer pricing ready for its first reading in the Duma before the end of the year. The proposed law defines clearly the nature of arm's length related party transactions and increases penalties for failure to adopt this approach. It also outlines procedures for Advance Pricing Agreements.

The law has been five years in the making; Russian commentators suggest that the legislation has grown in urgency after criminal proceedings were taken against the management of the Yukos oil company. The case against former Yukos executives, Mikhail Khodorkovsky and Platon Lebedev, was that they had evaded taxes by means of the group's transfer pricing policies. In May 2009, President Dmitry Medvedev said that such tax evasion schemes threatened the stability of state finances and the law needed to be changed to eliminate all risks of ambiguity in the Tax Code.

The draft amendments to the Tax Code involves the creation of a team of tax officials to monitor so-called "controlled transactions" between related parties. In the first year, the minimum level of controlled transactions, which must be reported to the tax authorities, will be RUB100m (USD3.5m), but five years on, the limit will reduce to RUB10m. Penalties for understatement of tax liabilities, where non-market pricing has been applied on related party transactions, can be up to 40% (presently 20%) of the tax arrears and subject to a minimum of RUB30,000.

Article 40 of the Tax Code, which sets current pricing guidelines, would be deleted and replaced by an entirely new section on all aspects of transfer pricing. Russia's 20% "safe harbor" regulations will also be abolished.

The terms have been brought more in line with Organization of Economic Cooperation and Development standards with a broadening of definitions of related parties and the inclusion of intellectual property rights as controlled transactions. Special attention will be given to commodity trading and transactions in which one party is established in a foreign country with especially low tax rates, or where no tax information exchange agreements are in place.

The bill also allows for consolidation of group accounts for tax purposes for the first time, in which case transfer pricing principles need not apply in respect of consolidated companies.

Advance Pricing Agreement procedures (APAs) will become available subject to a charge of RUB1.5m. Violation of APAs will likewise attract a RUB1.5m fine.

The Russian finance ministry expects the new law to be enacted by next spring and effective from January 1, 2011.

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