Transfer Pricing: Envisaged Changes to the RF Tax Code

1
Transfer Pricing Envisaged Changes to the RF Tax
Code
AEB Association of European Businesses in the
Russian Federation

• Stephan Beck
• Partner, Ernst Young
• Head of International Tax, Russia and CIS
• Tel [phone]

2
Discussion Points

• Some Selected discussion points related to
• Transfer Pricing Methods and Economic Aspects
• Reporting and Documentation Aspects

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Transfer Pricing Methods

• Current TP Legislation
• Comparable Uncontrolled Price (CUP) Method
• Resale Minus Method
• Cost Plus Method
• Strict hierarchy

• Draft TP Law
• Comparable Uncontrolled Price (CUP) Method
• 2a. Resale Minus Method
• 2b. Cost Plus Method
• 2c. Sale of Processed Product (Secondary Product)
  Method
• 2d. Comparable Profits Method
• 3. Profit Split Method
• Hierarchy but with flexibility
• Best method approach

4
Transfer Pricing Methods

• A wider selection of methods in the latest draft
  is good news
• Easier to align with international TP policy
• Easier to establish which is the best TP method
  to use
• However, some clarification is required, in
  particular
• TNMM should also be permitted
• Sale of Processed Product (Secondary Product)
  Method reasonable?
• Not an internationally known or used TP method
• Gives rise to various questions and uncertainties
  and should possibly be eliminated
• Application of profit-split should be broadened
  (situations mentioned should only be examples)
• Examples should be provided as to when certain
  methods may be used and be acceptable to reduce
  extent of potential disputes
• Internal CUPs should be included as appropriate
  benchmarks

5
TP Methods

• How to be interpreted?
• Mark-up at all stages across supply chain ?
• Allocation of losses ? e.g.,
• Production cost exceed market price
• Mark-up requirement results in stage 4 incurring
  cost gt market price

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Normal cost and normal profit

• Exclusion of shareholder/stewardship cost
  generally internationally accepted in order to
  determine the operational arms length result,
  but
• Cost not normal to one organization may be normal
  to others (e.g., higher headcount, even if
  otherwise comparable economic/commercial
  conditions)
• Exclusion of cost for services appears
  problematic
• Cost directly connected should be defined to
  also include overhead or indirect cost.
• Clarification recommendable also that any
  reasonable allocation method (or method used for
  business purposes) to be accepted
• Accounting records as basis ?
• Not all relevant data may be reflected in
  accounts (e.g., depreciated assets)
• Different accounting standards may apply on both
  sides of the transactions
• Typically do not reflect the value of intangible
  assets
• Clarifications recommendable as to acceptability
  of loss situations in context of different market
  strategies (e.g., start-up losses)

7
The Market Price Range

• Current TP Legislation
• Refers to the market price
• Taxpayers are allowed to deviate by 20 from the
  market price
• 20 safe harbour

• Draft TP Law
• Introduces a market price (profit) range
• Acknowledgement that there is not one market
  price only
• Identify all market prices
• Compute market price range
• Proposed range is heavily influenced by the
  extreme observations

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The Market Price Range

• The market/profit price range concept is in
  line with international TP practice
• International practice Interquartile range
• The suggested statistical methodology is not in
  line!
• Taxpayer will be at the mercy of extreme
  observations
• Should be aligned with the International accepted
  definition of Interquartile range (and possible
  other statistical methods should be accepted as
  well if appropriate)
• Clarification should be made that adjustments
  permitted to account for differences
• Clarification that only public data should be
  permissible to be used to calculate range

9
Market Price Range

• Interquartile Range Approach
• Recent project 13 comparable companies
• Three-year pooled interquartile range Operating
  Margin

• Draft Laws Market Price Range
• Same 13 comparable companies
• Computed ranges based on draft laws definition
  of a market price range

40
40
10
Reporting and Documentation
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Documentation and Reporting

• Time permitted for documentation and reporting
  very tight should be extended
• Possibly limit requests for documentation
  generally to cases of on-site audits?
• Extensive reporting/declaration obligations
  (information not necessarily readily available),
  and unclear including
• Aggregation level unclear but should be permitted
  and defined
• Threshold of 1mio Rbl
• Limit the amount of reporting with tax return (if
  at all required)
• E.g., at least reduce to overall volume of
  transaction by related party (possibly by main
  type of transaction such as interest, goods,
  services intellectual property)
• Economic gain Requirement often practically
  very difficult to satisfy (or at least very
  subjective) without undue efforts and required
  reliability (e.g., Umbrella-Brand v. Sub-Brands)

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Documentation and Reporting

• No reference to internal available policies
• Clarification that available internal policies
  could be used as part of the documentation
• Functions performed, risk assumed and assets
  employed may not be easily available from all
  parties involved
• What if unrelated parties involved?
• Least complex party should be focus
• Using pan-European (or other) reports and
  benchmarking data would be welcomed for
  cross-border transactions (some adjustments to
  data may be required)
• Less burdensome, less costly
• Reporting and documentation requirements both for
  domestic and cross-border transactions necessary ?

13
Possible main documentation contents
Discretionary format Should generally
acceptable content be described to reduce
potential disputes and align with international
practices?

• Documentation can be done e.g.
• By Division
• By Entity
• By Transaction Category
• Across Integrated Supply Chain

• Typical documentation
• Industry Analysis
• Company Analysis
• Functional Analysis
• Economic Analysis
• Outline of relevant rules
• Accept / Reject List

All should be permissible depending on the
specific situation - and possibly examples given
to limit potential disputes