Transfer Pricing in Russia: What you need to know

The rules on transfer pricing were introduced in Russia in 2000, were substantially amended in 2011 and came into force on January 1, 2012. The rules did not refer directly to the OECD Transfer Pricing Guidelines even though they mainly follow these principles. The previous guidelines on transfer pricing had been invoked since 1999, but rarely applied in practice. This amended rule may likely become the priority of the tax authorities, as they are required to give much attention to this issue. A taxpayer must justify the prices applied under this new scheme irrespectively of any chosen transfer pricing policy which may require current documentation of the used transfer price policy. Nevertheless, transactions must comply with the arm’s length principle. This implies that transactions between related parties must be made under similar terms as would have been agreed between unrelated parties.

Related Parties

Article 105.1 of the Russian Tax Code refers to related persons as those whose mutual relations may affect the results of their activity or the activity of persons represented by them. The tax code lists cases where persons can be treated as related parties. The level of participation in management and control is the main factor to be taken into account. The persons below are considered to be affiliated:

  • A company that has above 25% shareholding in another company.
  • An individual that has above 25% shareholding in a company.
  • An individual that is an official subordinate of another individual.
  • An individual that directly or indirectly participates in any entity holding at least 25% the share capital. Both an individual and an entity entitled to appoint the sole executive body of this entity, or to appoint not less than 50% of the executive board of directors of the entity.

Transfer pricing methodology

According to article 105 of the tax code, the following methods are the applicable for the review of the arm’s length principle:

The comparable market price method (CUP)

Under Article 105.9 of the Tax code, this method tends to determine the conformity of the price of the goods in the analyzed transaction to the market price. This could be achieved by comparing the price used in the analyzed transaction with the market price range.

The resale price method (RPM)

Based on Article 105.10 of the Tax code, the resale price method is also used to determine the conformity of the price in the transaction under review to the market price. This would be achieved by comparing the gross profitability of the goods bought with the market range of gross profitability. The resale price method is most suitable in cases where the products are purchased in a controlled transaction and are resold without any processing in a transaction especially where the parties are non-related entities.


Cost plus method (CPM)

The cost plus method compares the gross return on direct and indirect costs of a person being a party to the analyzed transaction with the market range of total return on the corresponding costs.

Net margin method (NMM)

Under this method, the operating profitability of a person being a party to controlled transaction is compared with the market range of operating profitability of independent companies incorporated in the same industry.

Profit split method (PSM)

This method compares the actual distribution of the total profit received by all related parties to the transaction among the parties to the transaction with the distribution of profit among the parties to the reference transactions.

Criteria used for the application of transfer pricing methods in Russia

The Tax Code gives more priority to the CUP and resale price methods. The CUP method is best applicable when information regarding the comparable transaction is available. However, in most cases, the resale price method is mainly suitable. If none of the TP methods are appropriate, the market price of the transaction may be determined by performing an independent appraisal in accordance with the applicable Russian or foreign law. If the application of the statutory methods does not define the market price, the price confirmed by an independent evaluation would be accepted for transfer pricing purposes.

Comparability analysis

Russia mostly follows the guidance on comparability analysis outlined in Chapter III of the TP Guidelines of OECD. The arm’s length principle is applied by comparing the terms in a controlled transaction to the conditions in transactions between non-related parties under similar economic circumstances. This implies that taxpayers should justify the prices applied in transactions with related entities by providing evidence that third parties would have used the same prices under similar situations.

Comparability analysis aims to analyze the functions and risks undertaken by the affiliated and independent companies. In the first step, taxpayers collect information on potential comparable transactions. The second step requires the interpretation of the collected financial information and the execution of any comparability adjustments. The comparable data retrieved from the abovementioned process is further used to calculate the arm’s length range and justify the prices applied by taxpayers.

Arm’s Length Range

The following profitability indicators are used when determining taxable income generated by the transactions where the parties are associated:

  • Gross return on costs is defined as the ratio of gross profit on the production cost of the goods sold.
  • Return on sales is the ratio of before tax profit to the total turnover excluding any excise duties and value-added tax.
  • Return on costs is determined as the ratio of profit from sales to the total cost (cost of production of the goods, commercial and management expenses related to the sale of the products).
  • Return on commercial and management costs is provided by the ratio of gross profit to commercial and administration expenses related to the sale of goods.
  • Return on property is given by the ratio of profit from sales to the current market value of assets directly or indirectly used in the transaction under evaluation. In the absence of information in respect of the current market value of the assets, the return on assets can be assessed on the basis of the book value in line with the accounting records of the company.

Comparability adjustments

Under the comparability process, adjustments are made with an allowance for:

  • The risks assumed by members taking part in the transaction.
  • The financial and commercial terms of the agreements.
  • The functions provided by each member of the party.
  • The characteristics of the market.
  • The real place of the transactions.

The income of the parties involved in a controlled transaction shall be determined by taking into account the economic risks assumed and the assets used, under the current economic circumstances of the market. The performance of uncommon functions, the use of an asset which may materially affect the income and additional commercial risks taken by the parties, shall be accompanied by an increase of the expected income from the transaction.

Intangible property

There are no relevant rules for the treatment of controlled transaction involving intangibles. The TP rules concerning transactions on intangible assets are not yet detailed. In addition, the recent OECD recommendations in the Russian practice are yet to be noticed. Therefore, several guidelines are only provided by previous court practices and. Current rule on transfer pricing consists of few references to intangible assets, as follows:

  • Functional analysis: The intangible assets owned by the parties should be taken into account when analyzing the parties’ functions.
  • Transfer pricing documentation: The information on economic benefits derived from acquisition of rights to the firm name, intellectual property, trademarks, and other intellectual property rights should be provided with the information on economic benefits from the controlled transaction.
  • Transfer pricing method: if the party possesses materially physical intangibles, the transactional profit split method would be suitable in such situation.

Requirement for documentation

The documentation requirements are stated in Article 105.15, Section V.1, Part One of the Tax Code of the Russian Federation.

The new rules on transfer pricing require taxpayers to provide evidence justifying the prices applied in all controlled transactions. The relevant act did not specify the form of the documentation file but defines the minimum content. In more detail, TP documentation shall, at least, include the following relevant information:

  • The activities of the parties involved in the transactions.
  • List of the parties in the transaction.
  • Description of the transaction, including the method applied for determining the price, the terms of the transaction, terms of payment, and other relevant information.
  • An analysis that clarifies the functions and risks undertaken by the parties.
  • Reasons why a specific transfer pricing method is applicable.
  • Sources of information on the transaction.
  • Information about income received and expenses incurred in a controlled transaction.
  • Calculation of the arm’s length range.
  • Information regarding any relevant tax adjustments made by the taxpayer.

Documentation Penalties

Tax authorities may adjust controlled prices if such prices applied do not conform to market prices. Under this practice, tax auditors may add to the tax base the revenue that taxpayers would have earned if correct pricing would have been applied. Taxpayers can adjust their taxable profits voluntarily in line with the results of applied TP methods, provided that the adjustment does not reduce the tax liability of the company. It shall be noted that where additional taxes are imposed on a party due to deviation from market prices, the related party to the transaction can adjust its taxes accordingly. However, such tax refunds are provided for domestic transactions carried out by Russian taxpayers. Such profit revisions are available only when the tax authority imposed additional taxes to one of the parties in the transaction. Taxpayers cannot apply such adjustments if the related party voluntarily increases its tax base by using the principle of arm’s length.

Also, foreign companies with a permanent establishment in Russia cannot apply such adjustments despite paying taxes to the Russians tax authority. This provision thus results in discrimination of permanent establishments compared to Russian companies. From 2014, taxpayers who do not apply market prices shall be liable to an appropriate penalty of 20% in addition to tax adjustments. This penalty will be increased to 40% from 2017, unless the considered violation relates to 2014-2016, in which case the penalty of 20% will be applicable. Taxpayers are thus potentially liable for the following sanctions:

  • Payment of taxes as recalculated by tax authorities.
  • Payment of penalty for late remittance of tax.
  • From 2014 onwards, an additional penalty for not applying prices within the market range.

Advance pricing arrangements

The new transfer pricing rules also establish the mechanism of Advance Pricing Agreements (APA) between tax authorities and taxpayers. Advance Pricing Agreement is more concerned with the particular method used to determine the prices of controlled transactions and only significant taxpayers may enter into such agreements.

An APA is entered into force upon the receipt of a taxpayers’ application. These applications are reviewed by the competent officers, provided the taxpayers paya stamp duty of RUR 1.5 million.

Transfer Pricing Audit

Audits on Transfer pricing are conducted by a special department of the Federal Tax Service. The audit may review up to 3 calendar years; however, the law provides exceptions for 2012 and 2013:

Ø Tax audits for 2012 may be initiated no later than December 31, 2013.

Ø Tax audits for 2013 may be undertaken no later than December 31, 2015.

Tax audits do not usually exceed six months, but in some cases, tax authorities may stretch it up to twelve months, depending on the scope and volume of the work to be done. An extension of up to a 21 month period is also provided in cases where foreign authorities shall be involved or additional time is required for the translation of documents.


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