Transfer pricing in Russia and international trends

20 June 2013

Steven Cawdron, Ernst & Young Moscow

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International trends

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Changes in TP today – tax enforcement and controversyErnst & Young’s 2012 Tax Risk & Controversy survey► Dramatic effect of globalization► Tax administrators have become more aggressive and

focused► High pace of legislative change► Growing disclosure and transparency requirements► Expansion into emerging markets brings uncertainty ► A new breed of tax activism has emerged

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2012 Ernst & Young Global Transfer Pricing Tax Authority Survey► The 2012 Transfer Pricing Tax Authority Survey covers 50

tax authorities across the Americas, Asia Pacific, Europe, the Middle East and Africa

► Key survey results► Increase in tax authority staffing► Resilience of the arm’s length standard► Expanding geographic scope of transfer pricing legislation► Specific industries and countries under scrutiny► Increase in the imposition of penalties► Increase advance pricing agreement availability

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OECD and United Nations influences and factors► New OECD proposals

► Simplication of tax/transfer pricing administration► Safe harbors► Intangibles► BEPS

► UN engagement with emerging markets► Lack of comparables► Seen as a practical manual for the preparation of TP

documentation in developing countries► Being used to drive the political agenda by the BRICS (in

particular, Brazil, India and China).

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Audit topics, triggers and managing audits► More exchange of information activity between

governments and international matching of transactions to see if TP is correct

► TP documentation comparables becoming the weak link► Intangibles, intangibles, intangibles► Higher-profile disputes

► Reputational, financial, and even personal risk► Penalty exposure

► Expectation for taxpayers to comply with both the spirit and the letter of the law

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Russian Transfer Pricing

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New Russian Transfer Pricing Rules

► New rules became effective from 1 January 2012► Transition rules 2012-2013

► Primary focus is on related parties transactions► Although domestic transactions are also subject to control

if certain thresholds are reached► It has introduced:

► the arm’s length principle, i.e. substance over form► new Transfer Pricing methods, akin to the OECD► TP reporting / documentation requirements► TP audits & penalties► APA’s

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Developments in 2012 and 2013

► Taxpayers have sought guidance from the ministry of finance on a number of issues, including:► Grouping of transaction, calculation of the threshold for control,

application of the rules to financing transactions, application of penalties, preparation of documentation, data permitted for us as comparables, etc

► The Tax authority is directing resource at certain industry sectors

► Increasing exchange of information, and experience, between the Russian Tax Authority and Foreign counterparties

► First APA’s concluded, albeit with state companies and only on transactions priced with CUP

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Significant issues still exist

► The introduction of TP rules has helped the Russian tax system move closer to international standards

► However, significant practical issues still exist► More needs to be done to address:

► Year-end pricing adjustments► Intellectual property charges► Service charges and models► Compliance burden► Interaction with other taxes – customs & indirect

Thank you!