Overview of sweeping changes to the transfer pricing rules

The Federal Law introduces additional grounds for legal entities to be classified as related based on the extent of participation in their capital and/or management.

For instance, in a change aimed at harmonising the provisions of the Tax Code on transfer pricing control and on controlled foreign companies, a controlling person and his controlled foreign company will also be considered as related entities, as will controlled foreign companies which have the same controlling persons.

Organisations will be classified as related entities where an individual possesses an ownership interest of more than 25% in one such organisation and/or has the authority to appoint that organisation’s sole executive officer or to appoint at least 50% of the members of its collegiate executive body or board of directors (supervisory board), and another individual has a similar ownership interest and/or authority in the other organisation, and those individuals are related persons in accordance with subsection 11 of clause 2 of Article 105.1 of the Tax Code.

Also under the Federal Law, transactions with foreign unincorporated entities registered in an offshore jurisdiction will be treated as controlled where at least one of the participants in the entity concerned is registered in an offshore jurisdiction.

It should be noted that the Federal Law extends the range of transactions that are not classified as controlled. The following, in particular, are excepted from control:

• Transactions with foreign export credit agencies and foreign organisations that carry on banking activities from jurisdictions with which a tax treaty has been suspended, provided that the following conditions are met: the obligations arose before 8 August 2023[3] and confirmation has been provided that the Russian debtor organisation and the foreign creditor organisation are not related.
• Transactions which gave rise to debt obligations referred to in subsection 8 of clause 2 of Article 310 of the Tax Code.
• Transactions with counterparties from jurisdictions with which a tax treaty has been suspended, provided that the agreements underlying those transactions were concluded before 1 March 2022, and the procedure applied in those transactions for determining prices and (or) pricing methods (formulae) was not altered after 1 March 2022, and the transactions in question are not classified as controlled in accordance with the provisions of clauses 1 and 3 of Article 105.14 of the Tax Code in effect as at 1 March 2022.

The Federal Law introduces the possibility for a secondary adjustment to be applied via the withholding tax mechanism where the tax base has been shifted out of the Russian Federation through the setting of non-arm’s length prices in transactions with related parties.

Under the amendments made, the tax base for the purpose of making the secondary adjustment will be the amount of the primary adjustment of the tax base.

Where a taxpayer made an independent adjustment to the tax base for profit tax before paying profit tax for the period in which the controlled transaction took place and funds were repatriated to the Russian Federation, exemption from a secondary adjustment would apply.

If an independent adjustment is made and funds are repatriated after the date on which profit tax is paid for the period in which the controlled transaction took place but before an audit provided for in Article 105.17 of the Tax Code is initiated, exemption from a secondary adjustment will apply provided that the taxpayer recognises non-sale income in the form of interest for the use of another’s money at the rate of 1/300 of the Bank of Russia key rate for each day of that use.

We will now look at what is probably one of the most significant changes for taxpayers that use price reporting agency (PRA) data and exchange quotations in demonstrating that prices are compliant with the arm’s length principle.

In the current version of the Tax Code, clause 6 of Article 105.9 states that, where PRA data on prices (price ranges) for identical (similar) goods (works, services) are used in applying the comparable uncontrolled price (CUP) method, the lowest and highest values of the market price range may be taken to be the published lowest and highest values respectively of prices in transactions concluded in an equivalent period of time under comparable conditions.
 

The Federal Law provides for the exclusion of clause 6 of Article 105.9 of the Tax Code. Consequently, the calculation of the market price range based on PRA and exchange data will take place according to the general rules set forth in Article 105.8 of the Tax Code, which will cause the calculation range to be narrowed.

In addition, it is provided that the market range may be calculated using information on comparable transactions with unrelated persons concluded not only by the taxpayer but also by a related party to the controlled transaction. This may happen as long as the transactions in question are comparable with the controlled transaction being analysed.

If the tax base is adjusted as a result of a TP audit, that adjustment will be made by reference to the median value rather than the highest or lowest value of the market price/profit margin range.

Where, however, a taxpayer makes an independent adjustment, it is possible to use any value within the price/profit margin range.

The Federal Law alters the criteria used in classifying a set of organisations as an MNE group.

Specifically, the modified version of subsection 1 of clause 1 of Article 105.16-1 of the Tax Code provides that where, in relation to a set of organisations, consolidated financial statements are prepared in accordance with the requirements of legislation or such statements would be prepared if the securities of any of those organisations and/or foreign unincorporated entities were admitted to trading on a stock exchange (a foreign stock exchange), that set of organisations is deemed to be an MNE group.

Those changes may result in a greater number of taxpayers being recognised as MNE groups.

TP documentation
 

The Federal Law makes changes to the content of TP documentation in relation to controlled transactions.
In particular, the documentation must include information on the income and expenditure, number of employees, profit (loss) and value of fixed assets and intangible assets of a foreign counterparty in a controlled transaction for the reporting period in which the controlled transaction was concluded.
 

The new rules also include a requirement to prepare and provide, together with the TP documentation, documents supporting the functional analysis, including the financial statements of a foreign party to the controlled transaction.
If the financial statements cannot be provided together with the TP documentation, they must be submitted no later than 12 months from the end date of the financial year in which the controlled transaction was concluded.
 

In addition, the documentation should include a description of adjustments made to ensure the necessary degree of comparability of the financial and/or commercial terms of controlled transactions and of transactions/organisations taken for comparison.
 

The Federal Law also establishes a requirement to attach documents containing the registration details of a foreign counterparty which is a party to a controlled transaction and details of persons acting on behalf of that counterparty which were provided to the taxpayer at the time the controlled transaction was concluded.
 

At the same time, it is made obligatory for taxpayers to provide the documentation specified in Article 105.15 of the Tax Code to the tax authorities outside the framework of transfer pricing audits.
 

Taxpayers that carry out foreign trade transactions involving the commodity groups specified in clause 5 of Article 105.14 of the Tax Code will now be required to provide TP documentation together with a notification of controlled transactions. The Federal Law also states that TP documentation relating to transactions involving those commodity groups for 2024 may be submitted no later than 1 December 2025.
 

Notification of controlled transactions
 

The Federal Law extends the range of information which must be disclosed in a notification of controlled transactions.
 

Specifically, in the case of transactions involving goods, it will be necessary to provide information on the terms of the transactions, including the delivery basis, the date of shipment of the goods (date of transfer of title to the goods, date of recognition of income (expenditure) connected with the transaction), and information on TP methods used and sources of information on comparable transactions.
 

Additionally, in the case of transactions between related parties in accordance with Article 105.1 of the Tax Code and involving goods falling within one or more of the commodity groups specified in clause 5 of Article 105.14 of the Tax Code, it will be compulsory for the notification of controlled transactions to contain information on the subsequent sale and/or preceding purchase of the goods and the conditions thereof (information about the value chain).
 

The taxpayer must take measures to obtain information about the value chain from its related parties and does not have the right to cite a refusal by a related party to disclose that information.
 

Financial statements of foreign members of an MNE group
 

The Federal Law imposes an obligation on MNE groups to provide the financial statements of those of their members which are not tax residents of the Russian Federation if any company in the group deals in goods falling within one or more of the groups specified in clause 5 of Article 105.14 of the Tax Code.
 

Specifically, where any member of an MNE group has more than 50% of its assets in Russia and has bought or sold goods falling within one or more of the groups specified in clause 5 of Article 105.14 of the Tax Code, the parent company of that MNE group must provide the consolidated financial statements of the MNE group and the financial statements of those foreign (non-resident) members of the group which either entered into such controlled transactions or provided associated services in relation to the goods in question (carriage, storage, packing, insurance, financing, marketing, and other services). According to the Federal Law, statements must be provided in electronic form not later than 12 months from the end date of the financial year.
 

It is also important to note that that the parent company of an MNE group or the authorised member of an MNE group, where they are a Russian organisation or a foreign organisation which has voluntarily declared itself a tax resident of Russia, may be requested outside the framework of a TP audit to provide information (documents) relating to transactions of members of the MNE group which are not tax residents of the Russian Federation.

The Federal Law makes enhancements to the rules regarding the conclusion of APAs. In particular, this instrument is made available to all taxpayers in relation to controlled transactions in excess of 2 billion rubles over a calendar year involving the commodity groups specified in clause 5 of Article 105.14 of the Tax Code.
 

It is also made possible for APAs to cover a period spanning up to five years by allowing them to include, inter alia, transactions concluded during the two years preceding the year in which the agreement is applied for.
 

However, the right to include past periods does not extended to bilateral APAs.
 

Finally, the state duty for the consideration of an application for the conclusion of an agreement is reduced from two million to one million rubles.

The Federal Law substantially increases sanctions for TP violations.

The changes primarily affect fines for the non-payment or underpayment of tax as a result of the application in commercial and/or financial transactions of conditions that are not comparable with the commercial and/or financial conditions of transactions between non-related persons.

The fine is set at 100% of the unpaid amount of tax on income referred to in paragraph 1 of clause 6.1 of Article 105.3 of the Tax Code, but not less than 500,000 rubles.

It is important to note the following:

• The changes affect only cross-border controlled transactions
• Fines become payable only on the basis of an audit

Fines for the non-submission TP reports of all kinds (notifications of controlled transactions, TP documentation and country-by-country reports) or for the provision of incorrect information in such reports are substantially increased. For example, the fine for the non-submission of a controlled transaction notification will increase from 5,000 to 100,000 rubles, while the fine for the non-submission of a notification of membership of an MNE group will rise from 50,000 to 500,000 rubles. For other types of reports the increases are even more substantial, reaching as high as 1,000,000 rubles.

The Federal Law also introduces a fine of 500,000 rubles for the non-submission of TP documentation (for each individual transaction or group of similar transactions). In addition, a fine of 1,000,000 rubles is introduced for a failure to submit the financial statements of foreign companies within a multinational enterprise group.

Furthermore, the provision exempting a taxpayer from a fine if it provides documentation supporting the arm’s length nature of prices in controlled transactions will now be applicable only to transactions within Russia.

The Federal Law makes amendments to Article 269 of the Tax Code insofar as it concerns the calculation of the interest rate thresholds used in determining interest income or expense which is recognised for taxation purposes.

Specifically, commencing from 1 January 2024 the following “safe harbours” will apply depending on the currency of a debt obligation:

• Russian rubles: from 10 to 150 per cent of the CBR key rate. In this respect, the lowest interest rate threshold may not be less than 2 per cent.
• Euros: from 1 per cent to the €STR rate in euros plus 7 percentage points.
• Chinese yuan: from 1 per cent to the SHIBOR rate in Chinese yuan plus 7 percentage points.
• Pounds sterling: from 1 per cent to the SONIA rate in pounds sterling plus 7 percentage points.
• Swiss francs: from 1 per cent to the SARON rate in Swiss francs plus 5 percentage points.
• Japanese yen: from 1 per cent to the TONAR rate in Japanese yen plus 5 percentage points.
• Other currency: from 1 per cent to the SOFR rate in US dollars plus 7 percentage points.

TP audit period

We would also like to draw attention to the amendments proposed by the draft law “Concerning an Amendment to Article 105 of Part One of the Tax Code of the Russian Federation”. The changes would enable a TP audit to examine controlled transactions concluded over a period not exceeding three calendar years preceding the year in which the decision to conduct the audit is made, irrespective of the date on which a controlled transaction notification is submitted or a notice is received from the local tax authority.

Participation of local tax authorities in TP audits

The amendments proposed by the Tax Policy Bill would allow the Federal Tax Service to ask officials of local tax authorities to take part in TP audits.