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Tax Connect Flash | New Russian transfer pricing federal law No. 227-FZ entering into force from 1 January 2012

The longest-awaited Russian tax law in recent years – the law on transfer pricing – has been adopted by the Russian parliament, signed by the Russian President and published officially in July 2011, and will come into force from 1 January 2012. The necessary adaptation of transfer pricing policies and preparation of the required documentation which will ensue from this is certain to require substantial efforts from groups of companies operating in Russia, within a short period of time.

The Law in the first place amends the Russian Tax Code by supplementing it with a new section devoted to related parties, pricing principles, tax control over transactions between related parties and advance pricing agreements.

Scope of application

According to the Law, both domestic and cross-border transactions will now be subject to transfer pricing control.

Regarding cross border transactions, any related party transactions as well as transactions with the same counterparty related to the trade of goods on a foreign trade exchange or involving residents located in offshore jurisdictions “black-listed” by the Russian Ministry of Finance, which total yearly turnover exceeds certain ceilings, will fall within the scope of the Law.

As for domestic transactions, the Law applies exclusively to related party transactions and, in particular, to any transactions which yearly turnover with the same counterparty exceeds 3 bln roubles (about 75 mln Euros), amount progressively reduced to 2 and 1 bln in 2013 and 2014 respectively. It also covers a certain number of more specific transactions such as those involving payment of mineral extraction tax or in which one of the parties benefits from corporate profits tax exemptions, under certain conditions.

The list of related parties stipulated by the Law notably includes companies (or an individual towards companies), where one of them holds directly or indirectly more than 25% of the charter capital of the other or companies which have the same mother company with more than 25% direct or indirect shareholding in their respective charter capitals.

If a transaction falls under the definition of a controlled transaction, the parties are obliged to perform a benchmark analysis to determine the relevant market price range before concluding the contract and properly document the said transaction.

Transfer pricing methodologies

According to the Law, the market range of prices (profitability range) should be defined using a statistical approach, which is in the spirit of the interquartile methodology provided for by the OECD guidelines. This profitability range replaces the currently allowed 20% deviation threshold from the market price, and is expected to narrow it.

Regarding the transfer pricing methods, the Law preserves the three existing Russian transfer pricing methods (comparable uncontrolled price (CUP), resale minus and cost plus) and introduces two additional methodologies (comparable profitability and profit split). Among these five methods, the CUP will have top priority, and the profit split method will be used as a method of last resort. The best approach method will apply for the three remaining transfer pricing methodologies.

Documentation requirements

Another aspect of the Law that will significantly impact Russian businesses is the obligation of companies to specifically document and, in some instances, notify the tax authorities on their controlled transactions. This obligation consists in a general duty for taxpayers to prepare and submit documentation justifying the price applied in all controlled transactions.

The detailed documentation on the transactions may not be demanded by the tax authorities before 1 June of the year following the year of the transaction which practically means – for transactions concluded in 2012 – not before 1 June 2013.

Control and sanctions

In terms of control, due to the relative complexity and amount of work required from companies to align transfer pricing policies, the legislator introduced specific transitional rules for 2012 and 2013 whereby the general rules (3-year controlling period) will apply only starting from 1 January 2014.

Ultimately, if the Russian tax authorities reveal that a price applied in a transaction does not correspond to the market one they are entitled to recalculate the amount of taxes due and apply penalties for the late payment of tax and fines equal to 20% from 2014 and 40% from 2017.

Advanced pricing agreements (APAs)

The Law provides for an opportunity for the largest taxpayers (Russian companies), from 1 January 2012, to conclude APAs with the tax authorities for a 3-year period with possible extension for 2 more years which will enter into force from 1 January of the calendar year following the year of the relevant APA conclusion. Therefore, the first APAs will come into force from 1 January 2013.

The Law also permits Russian taxpayers, in domestic transactions only, to obtain corresponding adjustments in case the tax base of one party to the transaction is adjusted as a result of a transfer pricing control.

How should companies prepare for the Law entering into force?

The practice proves it may take considerable time to put in place proper documentation support and, as the case may be, design or adjust Russian transfer policies to the requirements of the new law. It is highly recommended anticipating a request from the tax authorities in the transfer pricing area and to start preparing documentation now, before 2012, in order to have sufficient time to tune fine your transfer pricing policy and prepare supporting documentation.

CMS, Russia can offer you a full range of services related to preparations for the transfer pricing law coming into force, such as:

  • Diagnosis of your current activities through a "fast due diligence" (a combination of interviews and a Q&A questionnaire) with a view to assessing your level of exposure to the transfer pricing law provisions; and defining an appropriate action plan (potential adjustments, documentation requirements etc.)
  • Adapting your existing transfer pricing policy to Russian requirements or drafting a new transfer pricing policy
  • Preparing transfer pricing documentation
  • Preparing and negotiating advance pricing agreements, etc.


Upcoming events:

  • 13.09.2011 in Paris| Structuration juridique et fiscale de vos projets d'investissement en Russie
  • 27.09.2011 in Paris | New Transfer pricing law. What impact on your business ? Key provisions and road map Nouvelle loi sur les prix de transfert.Quel impact sur vos activités ? Dispositions clés et plan d'action


Portrait of Dominique Tissot
Dominique Tissot