Dear Sirs,

We would like to present you a brief overview of tax legislation updates concerning transfer pricing and VAT on services upon importation of goods into the territory of the Russian Federation.

Draft law On Transfer Pricing

We would like to pay your attention to the fact that draft law “On transfer pricing” was accepted by the State Duma in the 1st reading. The draft was accepted with a statement “amendments to the draft law to be submitted within 30-day period as of the date of acceptance”.

This Draft Law will expand and at the same time will determine more precisely the list of controlled transactions and the parties to be subject to control. In addition to the three existing transfer pricing rules, the Draft law introduces new methods: comparable profits method, profit distribution method. Along with official source of information the Draft Law provides for the new sources of information which may be used to determine the market price. Besides that, the New Rules update the tax control procedures.

The positive element of the amendments is the symmetrical adjustment rule – if a tax base for one party of the transaction is increased, another party may reduce its tax base correspondingly. As the negative issues we should note lack of instructions of application of some provisions of the Draft Law, as well, as unclearness of some points. 

VAT on services upon importation of goods

The Presidium of the Supreme Court of the RF during its session held on December 8, 2009 observed case related to VAT rate applicable to customs warehousing services of imported goods (“Summit Motors” against Interdistrict inspectorate of the Federal Tax Services on major taxpayer in Primorskiy kray).

As per the opinion of the tax authorities, in accordance with the provisions of sub-clause 2 of clause 1 of article 164 of the Tax Code of the RF, customs warehousing services related to imported goods are subject to VAT at 0%. Therefore, the authorities have denied the recovery of VAT paid at the rate of 18% based on VAT-invoices issued by the provider of the services in question.

However, courts of both instances have disagreed with the opinion of the tax authorities. As of sub-clause 1 of clause 1 of article 164 of the Tax Code of the RF tax rate of 0% is applicable to the sale of goods shipped under the export customs regime, or goods placed under the customs regime of free customs zone (considering submission of the documents provided by article 165 of the Tax Code of the RF). Based on provisions of sub-clause 2 of clause 1 of article 164 of the Tax Code of the RF VAT rate of 0% is applicable also to the services that are directly connected to the production and sale of the goods mentioned in sub-clause 1 of clause 1 of article 164. Since in the discussed case goods transferred into the territory of the RF were not placed under the customs regime of free customs zone, the court has decided that provided customs warehousing services related to the imported goods do not fall under the provisions of sub-clause 2 of clause 1 of article 164, and thus are subject to VAT at the general rate.

This Resolution of the Supreme Court eliminates indirect contradiction between sub-clauses 1 and 2 of clause 1 of article 164 of the Tax Code of the RF, where sub-clause 2 does not provide for any limitations of application of 0% VAT rate depending on the type of customs regimes under which goods are imported into the Russian territory.

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We hope the information above is helpful for you.

For more information on ALRUD Tax practice please visit our Web-site

or contact directly the Head of Tax practice, Senior Partner Maxim Alekseyev [email protected]

Kind regards,

ALRUD Law Firm

Please note: This is a Newsletter and should not be considered as a ground for making any decision regarding a particular issue. All the information for this Newsletter was taken from the open sources.