As of January 2014, the thresholds applicable to cross-border related party transactions, which dictate whether a transaction falls within Russian transfer pricing requirements, have been abandoned.
This means that all cross-border intragroup flows involving Russian taxpayers should be notified in the prescribed form and terms (the “Notifications”) to the Russian tax authorities on a yearly basis. The taxpayers are to file the Notifications for 2014 to the tax authorities by no later than 20 May, 2015.
At the same time, documentation (the “Russia Country File”), justifying the market level of prices charged should be prepared in relation to all of these flows. The Russia Country File may be requested by Russian tax authorities in terms of a tax audit for FY 2014, starting from 1 June 2015.
The following Russian transfer pricing regulations requirements, which have the aim of stiffening the existing regime, also became effective from January 2014:
- reduction of the threshold amount from RUB 2 bln to RUB 1 bln for domestic related party transactions (between Russian residents) to be recognized as “controlled”;
- extension of time limits for transfer pricing audits: the tax authorities are entitled to initiate a tax audit in relation to FY 2014 at any time between 1 June 2015 and 31 December 2017; and
- introduction of penalties: the penalty introduced in 2014 is set at 20% of the difference between the amount of tax that should have been paid, and the amount of tax that was actually paid (20% of tax underpayment). This will be increased to 40% in 2017.
In practice, this results in a significant extension of workload for taxpayers in order to meet the requirements of Russian transfer pricing legislation within the set deadlines. It is therefore highly recommended for taxpayers who have not yet initiated the preparation of their Russia Country File to undertake the following courses of action as soon as possible and, in any event, no later than by the end of 2014:
- analyse the potential scope of transactions subject to transfer pricing control and make a preliminary estimate of the additional related efforts and workload that will be necessary for documentation requirements;
- prepare a Russia Country File (e.g. diagnostic / functional and economic analysis), if and when needed; and
- introduce any required adjustments to the existing / planned contract terms (e.g. particularly on pricing), depending on the results of the economic analysis.
If a taxpayer already has local documentation in place for previous tax periods, it is recommended that they also start analysing the effect of the extensions of transfer pricing regulations on their existing TP policy. This will allow them to introduce any necessary amendments as part of their yearly update.
In conclusion, any foreign company operating in Russia through subsidiaries and involved in cross-border transactions with the latter may fall within the scope of Russian transfer pricing documentation requirements from 1 January 2014. For domestic transactions, Russian TP rules will apply only if the related party transactions taking place within the territory of Russia exceed 1 billion rubles for 2014 (i.e. around 20 million Euros).
If you think your company might fall within any of these two categories, then double-checking whether or not it has an obligation to notify and document these transactions for Russian tax purposes is strongly recommended.