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Key Changes to Russian Tax Legislation in 2011
New Transfer Pricing Law
The new transfer pricing (TP) law significantly changes existing TP regulations in Russia. Under the new law, there is no longer a requirement that the price applied by the taxpayer must deviate by more than 20% from the fair market price for it to be under control of the transfer pricing rules. Currently, tax may be recalculated based on the fair market price, even if the actual price deviates from the fair market value by less than 20%. Any transaction between affiliates may be subject to control as long as its value exceeds 1 RUB billion yearly, or 60 RUB million yearly (if just one of the affiliates is extracting company or is not a corporate income tax (CIT) payer or applies 0 % CIT rate to its income or is a resident of special, favourable taxation areas). This can also be applied to transactions of 100 RUB million yearly (if only one of affiliated entities is to benefit from special tax treatment (unified tax on inputed income, unified agricultural tax or a resident of a Russian special economic zone), but the other is not). There are also other types of transactions which are subject to TP control, the most notable being transactions with parties from an offshore tax haven.
In addition, based on the new law, taxpayers must report any controlled transactions to the tax authorities and supply supporting documentation to confirm the price reported. The burden of proving that the price that has been applied is in accordance with the TP law has not shifted to the taxpayer. This burden still lies with the tax authority. It should also be noted that TP matters will be dealt with by a special department of the Federal Tax Service, rather than via standard tax audits.
The new law introduces two new methods of TP control and provides that a symmetric adjustment may be made (i.e one taxpayer's tax burden may be reduced to mirror the tax increase of the counterparty in a controlled transaction). Large companies may also sign a TP Agreement with the tax authorities setting out the transfer pricing methods that will be applied to the company's transactions. However, the tax authorities have announced that this tool will not be commonly used. The tax authorities have indicated that they do not expect more than 20 TP Agreements to be signed in 2012. Such agreements are effectively Advance Pricing Agreements.
The Law on tax consolidation allows a consolidated taxpayer to be created from a number of separate tax-paying corporate entities in the same group of companies. The main rationale for this is to allow losses incurred by members within the same group to be offset against income generated by other members within the consolidated group. Whilst this is currently only applicable to larger consolidated groups, there is an intention to simplify the requirements for consolidation in future.
Double Tax Treaties
The Russian Government has recently started to renegotiate Russia's Double Taxation Treaties (DTTs) by singing Protocols to certain DTTs. Following from the Protocol with Cyprus which was signed last year, Protocols with Switzerland and Luxemburg were signed in late 2011. The Protocols regulate how the place of effective management should be defined, establish anti-avoidance provisions and create an information exchange regime. The Protocols also establish that gains derived from a disposal of shares in a company owning real estate are to be taxed in the contracting state where the real estate is located. In addition, the Treaty (eg treaties between Russia and Cyprus, Swiss and Luxembourg) will not exclude the right of the contracting States to apply thin capitalisation rules. The Russian court practice is also moving towards applying the thin capitalisation rules without having regard to the non-discrimination rules.
The amendments to the Russian transfer pricing rules are very important for every taxpayer doing business in Russia. The Law is complex, many issues are expected to arise in practice regarding price formation. For now, our advice to every taxpayer is to check the pricing policy and make any necessary changes to ensure compliance with the new rules. The Law on tax consolidation is closely connected with the new transfer pricing rules so the hope is that the Law will allow the consolidated taxpayer to apply the scheme to the smaller businesses in due course.
The protocol to the Double Taxation Treaty between Russia and Switzerland makes important amendments - in information exchange and thin cap rules, giving a tax benefit to some stock investors. But the great trend of the moment comes from two sides - legislative and judicial, that is on applying thin cap rules and taking attention not only on form but on matter also. Holding companies would do well to check the corporative structure and loan financing models to help minimise increasing tax risks.
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