TRANSFER PRICING TAX

INSPECTION: HOW TO PREPARE?

St. Petersburg 17/06/2014

Olga Mazina,

Deputy Director of Accounting Service Department, Tax Advisor

www.accountor.ru

- Transition period is finished!

- It is not just a fine of 5 000 RUR…

- Actions to take in 2014

- TP-documentation of the Group

- Identification of controlled transactions

- Comparability analysis: price or profitability?

- Tax recalculation based on market prices

- Notification of controlled transactions

- TP-documentation: choice of the method

- TP-documentation: comparable analysis of profitability

- TP-documentation: estimation of profitability

Transfer Pricing tax inspection: How to prepare?

17.6.20142

- Law on Transfer Pricing has been effective since 2012 (Federal Law 227-FZ of 18/07/11)

- 2012-2013 – transition period: notifications, preparation of TP-documentation and tax checks – only for companies which turnover for controlled transactions exceeded the limits of 100 mln.RUR (in 2012) and of 80 mln.RUR (in 2013).

- Since 2014 – no limitations. Concerning all transactions with foreign associated entities the following rules shall be observed:

- Notification on controlled transactions shall be sent to Tax Office annually till 20 th of May

- Tax check can be started since the 1st of June of 2015!

- TP-documentation must be submitted to the Tax Office within 30 days after request

Transition period is finished!

17.6.20143

- General approach to taxation in controlled transactions: incomes which are not received for the reason of difference between the Transfer Price and the Market price are taxable.

Tax shall be recalculated only if recalculation does not result in decrease of tax

- Fine for failure to submit Notification of controlled transaction – 5000 RUR

- Fine for understatement of tax due to application of Transfer Prices not corresponding to the market level – 40% of unpaid tax,

minimum – 30 000 RUR.

- Fine shall not applied in case if TP-documentation justifying Transfer Prices applied is available!

It is not just a fine of 5 000 RUR…

17.6.20144

Step 1: Identification of associated entities and controlled transactions

Step 2: Comparability analysis of Transfer Prices and Market Prices

Step 3: Recalculation of taxes based on a market price

Step 4: Notification of controlled transactions to Tax Office till 20th of May of

2015

Step 5: Preparation of Transfer Pricing documentation justifying Transfer Prices

applied

Actions to take in 2014

17.6.20145

- Some companies have TP-documentation developed in the Group

- As a rule it is documentation about the general concept on pricing

applicable in the Group, but this does not justify prices in certain

transactions with Russian branches

- Russia has its rules for TP-justification which differ from listed in

OECD-TP-Guidelines

- Tax Code of RF lists 5 methods of TP-justification, which Tax Office

uses while tax check

- Transfer Prices should be compared to the market level regularly

- TP-documentation of the Group can be adopted for use in Russia

TP-documentation of the Group

17.6.20146

- Dependence is defined by the rules established in Tax Code of Russia

Mother –Daughter:

Companies A and B are interdependent if Company A directly/indirectly owns more than 25% of Company B

Sister companies:

Companies A and B are interdependent if Company C directly/indirectly owns more than 25% of A and B

- Structure of the Group may be so brunched that companies are not able to calculate percentage of ownership by themselves

- Even for long chains of ownerships percentage can meet the criterion of Tax Code of RF

- Interdependence is not only sharing, but also common management

- Calculation of turnover for controlled transactions: 80 millions RUR – for transactions with all Group companies

- Loans: only interests are included

Identification of controlled transactions

17.6.20147

- Only public sources of information can be used

- Available databases:

SPARK.INTERFAX

ORBIS

AMADEUS

TP Specialist

Thomson Reuters, etc.

- How to find information about similar transactions in the market?If your product is unique…

Trade marks influence…

- Another option: Comparability analysis of profitability with indexes of other companies which have the same kind of business

Comparability analysis: price or profitability?

17.6.20148

- Market price / profitability is defined as an interval

- If your Transfer Prices or Profitability fall within market interval – tax

recalculation is not needed

- If your profitability is outside the market interval - pay additional taxes.

Income tax shall be recalculated upon results of the year.

- Taxes should be recalculated only in case if they are underpaid due to

applied Transfer Prices

Tax recalculation based on market prices

17.6.20149

- Format and instructions for filling in are issued by authorities (Order of

Ministry of Finance of 27/07/12 No MMV-7-13/524@)

- Notification contains information about sides of controlled transactions

and Transfer Prices applied

- Practice proved that volume of the Notification can be big. Trading

companies which have contracts in foreign currency (e.g. EUR)

declare prices of each item per each delivery

- IT-support eases the work

- If stock accounting is organized in Navision, SCALA, etc. IT-support for

making of Notification is necessary

Notification of controlled transactions

17.6.201410

- Methods of TP-justification offered by Tax Code of RF:

1. Comparable uncontrolled price method

2. Resale price method

3. Cost method

4. Comparable profitability method

5. Profit distribution method

- Method of comparable market prices is the primary, but hardly applicable

- For trading companies - Resale price method. Profitability of all sales operations have to be compared to the market level – special reports on margin are needed.

- The most realistic approach – comparability analysis of profitability

- Combinations of methods can be used

TP-documentation: choice of the method

17.6.201411

- Tax Code of RF allows to use different profitability indexes:For Resale price method

Gross margin = Gross profit / revenue

For Cost method

Gross profitability of costs = Gross profit / cost of sales

For Comparable profitability method

Profitability of sales = Operating profit / revenue

Profitability of costs = Operating profit /(cost of sales + commercial and management costs)

Profitability of commercial and management costs = Gross profit / (commercial and management costs)

Profitability of assets = Operating profit / assets

- Profitability is calculated based on the Profit & Loss Statement

- Unprofitable companies can apply these methods in case if they have income from operating activity

TP-documentation: comparable analysis of profitability

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- Profitability of the company is compared to the market interval of profitability

- Market interval is formed on the basis of Statistical information contained in special databases (e.g. SPARK-Interfax, ORBIS, AMADEUS etc.). Since 2013 companies are obliged to send annual financial statements to Committee of Statistics.

- It is needed to form a sampling of companies which meet criterion listed in Tax Code of RF:

kind of economic activity

positive NET ASSETS

no losses for more than 1 year for which profitability is calculated

share of other companies and in other companies – less 25%

- Technically it is possible to select companies by other criterion

- Check your profitability, choose the index which fits you the best, prepare TP-documentation

TP-documentation: estimation of profitability

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Thank you for your attention!

St. Petersburg, 17/06/14

17/6/201414