The longest-awaited Russian tax law in recent years – the law on transfer pricing – was adopted on 8 July 2011 and will come into force on 1 January 2012. By the time the law on transfer pricing comes into force, companies operating in Russia will be required to have adapted their transfer pricing policies and prepared all required documentation. This will require substantial effort over a relatively short period of time.
Multinational Enterprises (MNEs) will need to adapt rapidly to the new law and closely monitor it for any future changes in Russian commercial and economic environments:
- there will be an increasing focus on compliance, enforcement and legislative approaches, and dealing with these complex issues will provide a significant challenge;
- as Russian regulations are becoming more prescriptive, the number and complexity of tax investigations being conducted by the Russian tax authorities will rapidly escalate, and the quantum of tax adjustments will rise accordingly.
Within this framework, the design and implementation of internal pricing now represents much more than a compliance issue. Clear, practical advice is vital for the establishment of a robust, tax effective structure.Transfer pricing provides significant opportunities for MNEs to adapt their internal remuneration policies to maximise tax effectiveness and ensure close alignment with their business and commercial strategies in Russia.
A full range of services
Our tax lawyers have extensive experience of dealing with tax authorities on transfer pricing cases and bringing those cases to a successful resolution. Our practical experience, together with our in-depth financial and economic knowledge, enables CMS to provide world-class, strategic advice. Our expertise covers the full scope of transfer pricing issues, from advanced planning to the practical management of tax audits, using international and local documentation, and integrating transfer pricing policies with other Russian tax and legal issues. This includes: Local and global transfer pricing documentation.
Russia has implemented provisions requiring organisations to document their transfer pricing policies. Severe penalties will be introduced for a failure to provide certain documentary evidence in the event of a transfer pricing adjustment to a tax return. Consequently, as an MNE, you should ensure that your Russian transfer pricing policy is properly established, recorded and regularly reviewed. All major pricing decisions relating to intra-group transactions should be fully documented, and the documentation carefully preserved in accordance with local requirements. This should help avoid unpleasant surprises such as penalties or significant defence costs, in the event of a tax audit of your Russian business.
Financial and economic studies
Financial and economic studies have become essential for supporting an organisation’s transfer pricing methodology and documentation requirements. It should be noted that the Russian tax authorities can use various official sources of information – both foreign and domestic - to justify their tax adjustments; therefore detailed technical analysis is critical to support the data that an MNE uses to justify its pricing.
Transfer pricing policies for intellectual property Intangibles, such as trademarks and R&D activities, represent a significant component of the transfer pricing policy of an MNE as a tool for tax optimisation and cash repatriation.
The location of intangibles and corresponding cross-border flows are therefore one of the major items to be addressed in your Russian transfer pricing strategy.
Tax audits and litigation Over recent years, tax audits have increasingly focused on transfer pricing adjustments and often lead to double taxation. As a consequence, MNEs may well be required to robustly defend their current transfer pricing policy in Russia.
Our CMS lawyers have substantial experience both in the field of tax audits and litigation in Russia, and can therefore advise both on the substantive matters of a case and the procedural strategy to implement it. This is becoming ever more important as transfer pricing litigation increasingly rests on the determination of fine points of law and technical interpretation, as well as highly complex economic issues.
Advance pricing agreements MNEs may confirm in advance the arm’s length nature of their intra-group transfer prices by entering into advance pricing agreements with the Russian tax authorities. Such agreements can remain effective for a period of three to five years. In Russia unilateral, bilateral and multilateral agreements are now available. Based on our extensive expertise across Europe, we can offer detailed advice on the various options for underwriting your Russian transfer pricing position.
An integrated tax and economics approach
CMS firms have developed an integrated transfer pricing practice with its own economic resources. This team is able to provide you with a full range of economic analysis, from standard comparables searches to more complex studies such as activity-based costing, applications of the game theory and business or asset (including intellectual property) valuation. Our Europe-based economics team has managed and coordinated the work of recognised local experts in North and South America and Asia, enabling our practitioners to deliver truly global advice.
A coordinated, international team
To effectively address your transfer pricing needs, we have created a working group composed of tax lawyers and economists who regularly share expertise and experience. The group works closely with CMS lawyers specialising in other areas of law (such as intellectual property, customs and excise duties and VAT) in order to understand all aspects of our clients’ business and to add significant value.
In addition, CMS commercial lawyers can assist with drafting the agreements necessary to formalise a client’s chosen transfer pricing policy. As a result of our extensive European presence, together with our worldwide network of transfer pricing correspondents, we are able to provide you with a single contact partner in your home jurisdiction, or other relevant country, who will coordinate the wider team of specialists on your behalf. A proven track record and a prestigious client base CMS’ expertise in transfer pricing allows our lawyers to negotiate with Russian, European and global authorities.
We have been retained to negotiate Advance Pricing Agreement (“APA”) procedures between many European countries and other jurisdictions, such as the United States and Singapore. We are regularly involved in managing Competent Authority procedures between various countries including France, the United Kingdom, Germany, Switzerland, Spain, Australia, Japan and the United States. We have also successfully resolved a major case within the framework of the Italian procedure of “International Ruling”.
CMS works for many MNEs on transfer pricing matters, including more than half of the French index CAC 40 and a number of FTSE100 companies.
Key contact: Dominique Tissot | Partner. Head of Transfer Pricing group