Transfer pricing in the Russian Federation

All the companies that work with interrelated parties sooner or later face the issue of reporting on controlled transactions. International companies operating in Russia also encounter a number of aspects due to the specifics of the local legislation.

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Since 2014, Russia has its own system of documenting and declaring transactions between interrelated parties. The criteria of interrelations are defined in the Tax Code of the Russian Federation - Article 105.1 (2). With some modifications, which came into force on 01.01.2019, this system is still in effect.

Additionally, starting from 2018, companies that belong to a multinational group of companies, and meet certain criteria, are required to use and file the so-called “three-tier transfer documentation.” Below we address these aspects in more detail.

Russian System of Reporting on Controlled Transactions

In Russia, related-party transactions of all companies (including Russian subsidiaries of foreign investors) are subject to control if the amount exceeds a certain threshold value which differs depending whether the transaction is domestic or international.

Starting from 01.01.2019, foreign trade transactions are considered controlled if the total amount of transactions with a foreign related party exceeds 60 million roubles for a calendar year. This is a significant relaxation because until 31.12.2018 the threshold value was equal to zero, i.e. any foreign related transactions were recognized as controlled.

Russian domestic transactions are subject to control if the total amount of transactions exceeds 1 billion roubles for a calendar year, and either one of the conditions listed in clause 105.14.2. of the Tax Code of the Russian Federation is met (see… ).

The reporting on controlled transactions includes two mandatory documents:

  1. Transfer pricing notice that must be filed by May 20 of the year following the reporting one.
  2. Transfer pricing documentation that may be requested by tax authorities starting from June 1 of the year following the reporting one.

The notice is a sort of declaration which reflects all the details of related-party transactions for the reporting period (year). Transfer pricing documentation is a document confirming the reasonableness of prices in controlled transactions.

The new rules apply to transactions (income/expenses) related to the period starting from January 1, 2019, regardless of the contract date. Please note, that for 2018 it is necessary to report controlled transactions based on the previous threshold values.

Reporting on Controlled Transaction for Multinational Groups of Companies

In addition to the reporting system described above, starting from 2018, Russian taxpayers that belong to a multinational group of companies (hereinafter, MNC, the criteria for participation in MNC are defined in the Tax Code of the Russian Federation - Article 105.16-1 (1)) must prepare and submit three-tier transfer pricing documentation.

This regulation is valid only for companies whose revenues correspond to threshold values - depending on the parent company’s tax residence.

The threshold values for income (revenue) at the end of the financial year (starting from 2017), according to the consolidated financial statement, are as follows:

  • over RUB 50 billion, if the parent company is a tax resident of the Russian Federation;
  • over CHF 900 million, if the parent company is a tax resident of Switzerland;
  • the amount established by law of any other country, in which the parent company is a tax resident.

If this criterion is met, the company must prepare the following reporting forms:

  1. Notification of participation in the MNC;
  2. Country details, including: MNC global documentation (Master file); National documentation (Local file); Country report (Country-by-Country Reporting).

The notification of participation in the MNC is be filed in the electronic form by the Russian participant of the MNC and submitted to the corresponding tax agency, no later than eight months after the end of the reporting period. E.g., for the MNC whose financial year ends on 31 December the notification must be filed on 31 August of the next year, at the latest.

The country details are provided upon request of the tax authority. This report may be requested within 6-36 months after the end of the reporting period, and depends on the type of documentation, e.g. 12-36 month for the global documentation, and up to 6 month for the national documentation.

In certain cases, a MNC may authorize one of its participants (not necessarily a Russian company) to prepare the required documentation. However, the Russian participant of the MNC should have access to these documents, where necessary. Please also note, that normally the documents must be provided to authorities in the Russian language.

In summary:

if the company and its controlled transactions comply with all the above threshold values, the complete set of reporting documentation (according to Russian and international standards) includes 6 positions.

The Russian legislation provides for administrative measures and fines for an untimely or incomplete set of documentation, both for the legal entity (company) and the managing staff (CEO, Chief accountant, etc.).

To avoid this, we recommend to prepare all necessary documents in advance, given the volume of the reporting, in order to be able to submit it within the statutory time limits.

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