Member Article

On May 4 2011 the Ministry of Finance of the Russian Federation published on its website the draft law on transfer pricing, which includes the amendments introduced after the first reading held o February 19, 2010. These amendments were included as a result of multiple discussions of the draft law initiated within the respective committees of state authorities and business community, foreign tax authorities and financial organizations.  It is important to remind that the new law extends and more definitely specifies the list of transactions and persons subject to control. In addition to the existing methods of determination of the market price the draft law provides for a range of new methods (including the method of comparable profitability and the method of profit distribution). The draft law also defines new sources of information used for determination of conformity of the transaction prices to the market prices and states new methods of tax control over conformity of the transaction prices to the market prices.

Below we present the most significant  changes introduced in the draft law.

Controlled transactions

From the list of controlled transactions between the connected persons are excluded the transactions between such persons if all the parties to a transaction (including their separate subdivisions) are registered and pay income tax within one and the same constituent entity of the Russian Federation.

The limiting value of the income and (or) expenditure amount under all transactions between the mentioned connected persons for the respective calendar year has been reduced from RUR 100 to 60 million. Transactions the amount of which exceeds RUR 60 million are deemed controlled, and thus it is necessary to prepare documentation and notifications with regard thereto.

Methods of determination of conformity of the transaction prices to the market prices

The revised version of the draft law excludes the method of secondary product disposal price. Therefore 5 methods are suggested to be used (the method of comparable market prices, the method of subsequent disposal price, the cost-based method, the method of comparable profitability and the method of profit distribution). It is possible to use a combination of two or more methods.

The method of comparable market prices may be used for determination of conformity of the price being applied in a controlled transaction to the market price if on the respective market of goods (works, services) there exists at least 1 (in the previous version of the draft law – 4) comparable transaction the subject of which includes identical (similar) goods (works, services). For application of other methods 4 comparable transactions are still required. However if in consequence of application of all the stipulated conditions there are less than 4 companies left, the criteria for participatory interest may be increased from 20% to 50%.

Documentation justifying application of prices and notifications relating to the transactions

Such documentation may be demanded from a taxpayer by the authorized federal executive agency not earlier than the first day of June of the year following the calendar year in which the controlled transactions were made. The previous version of the draft law provided for much earlier date – the first day of April of the following year.

Verification of prices application

Owing to the innovative for the Russian market character of this draft law there are stipulated preferential conditions for verification of application of the transfer pricing provisions. It is provided that a decision on conducting verification with respect to the controlled transactions made in the year 2012 may be made on or prior to December 31, 2013; with respect to the controlled transactions made in the year 2013 – on or prior to December 31, 2015. Further the usual three year period shall apply.

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We hope that the submitted information will be useful to you.

To get more detailed information on the tax practice of the Law Firm ALRUD, please, visit our website

or get in touch with the Head of tax practice, Senior Partner Maxim Alekseyev [email protected]

Yours faithfully,

Law Firm ALRUD

Note: We draw your attention to the fact that this letter is of informative character only and may not be the ground for making decision on a particular matter. To prepare this letter we used information from open sources.