Baker & McKenzie: Russia Adopts New Transfer Pricing Rules Effective 2012

On July 18, 2011, President Medvedev signed into law new transfer pricing rules that substantially change the manner in which transfer pricing applies in Russia. The new rules will come into force on January 1, 2012. Most Russia based taxpayers should start working on meeting the expected documentation requirements and adjusting their transfer pricing policies in light of the upcoming changes. The key provisions of the new rules are as follows.

Controlled Transactions

The new rules require taxpayers to notify the tax authorities on controlled transactions that are performed in a given calendar year. Controlled transactions include any transactions between related parties (domestic or cross-border). Among other criteria, parties are considered related if one directly or indirectly owns more than 25% of another or can control the formation of at least 50% of the board of directors or the executive body of such other party. The courts may also determine that parties are related if the relationship between the parties could affect the results of transactions between them or their economic activities even in the absence of the statutory criteria.

In addition, the following transactions are subject to transfer pricing control:

  • cross-border transactions with oil and oil products, ferrous and non-ferrous metals, mineral fertilizers, precious metals and stones;
  • cross-border transactions with foreign entities registered in certain low-tax jurisdictions according to a list established by the Russian Finance Ministry, provided that the total revenues under these transactions exceed RUR 60 million (approx. US$ 2.1 million) in total in a given calendar year.

Transactions Outside Scope of Transfer Pricing Control

With certain exceptions, the following domestic transactions are not subject to transfer pricing control:

  • transactions between related parties not exceeding 1 billion roubles (approx. $35 million) in total in a given calendar year. For 2012 and 2013, this threshold will be 3 billion roubles (approx. $107 million) and 2 billion roubles (approx. $71 million), respectively;
  • transactions where both parties are registered and have all operations in the same region and do not have tax losses, including loss carry-forwards.

Russian taxpayers forming a consolidated taxpayer group would not be subject to transfer pricing control for profits tax purposes. The draft law on tax consolidation for profits tax purposes is currently being considered by parliament and is expected to come into force in 2012 together with the new transfer pricing rules.

Functional Analysis and the Use of Comparables

The new rules provide detailed guidance on selecting and adjusting comparables. The rules on performing a functional analysis are generally in line with the OECD Transfer Pricing Guidelines. There is a broad list of permitted data sources on comparables. The rules prohibit the tax authorities from using any outside comparables if the taxpayer has comparable transactions with unrelated parties.

Transfer Pricing Methods

Similarly to the OECD Transfer Pricing Guidelines, the new rules provide for five transfer pricing methods (comparable uncontrolled price, resale, cost plus, comparable profits, and profit split). The comparable uncontrolled price method is the primary method to be applied. In all other cases, the best-method rule applies. The profit-split method remains the last resort method. The use of two or more methods combined is also allowed for transfer pricing purposes.

One-off transactions that are outside the scope of ordinary activities of the taxpayer may be valued through an independent appraisal.

Market Price Range and Transfer Pricing Adjustments

The existing 20% safe harbour for price deviations is eliminated, and a quasi-interquartile market price range is introduced instead. Adjustments are permitted with respect to the following taxes: profits tax, VAT (if one of the parties does not pay VAT), mineral extraction tax (if paid on an ad valorem basis), and individual income tax. In certain cases taxpayers are permitted to make true-up adjustments for previous tax periods. Corresponding adjustments (i.e., in case a transfer pricing adjustment is made to another party of a controlled transaction) are allowed for Russian corporate taxpayers only. In a cross-border context such adjustments are not allowed.

Documentation Requirements

Taxpayers having controlled transactions (with certain exceptions) are required to maintain transfer pricing documentation and provide it to the tax authorities within 30 days of the relevant request. The transfer pricing documentation may be requested no earlier than June 1 of the year following the calendar year in which the relevant transactions took place.

For 2012 and 2013 the transfer pricing documentation and notification requirements and transfer pricing audit rules will apply only if the total value of controlled transactions with a given party exceeds 100 million roubles (approx. $3.5 million) and 80 million roubles (approx. $2.9 million), respectively.

Transfer Pricing Audits

Transfer pricing audits will be performed by a special department in the Federal Tax Service separate from the regular tax audit process. A transfer pricing audit for 2012 may be initiated no later than December 31, 2013, and for 2013 – no later than December 31, 2015.For 2014 and thereafter, a transfer pricing audit may be initiated for the 3 calendar years preceding the year when it is initiated.


A 40% tax penalty will apply if a transfer pricing adjustment is made and if the taxpayer fails to submit the required transfer pricing documentation to the tax authorities within the established deadlines. There will be no tax penalty in the case of a transfer pricing adjustment for the tax periods 2012-2013. For tax periods 2014-2016 the tax penalty will be 20%. Starting from 2017 the 40% tax penalty will apply.

Advance Pricing Agreements (APA)

Taxpayers that are regarded as major taxpayers under the Russian Tax Code will be permitted to enter into unilateral or multilateral advance pricing agreements ("APAs") with the Russian Federal Tax Service. The new rules also enable taxpayers to conclude APAs covering cross-border transactions with a party resident in a state having a double tax treaty with Russia under the competent authority procedures with the participation of the relevant foreign tax authority. In case of changes in the Russian rules covering APAs, the terms of concluded APAs are grandfathered.

There are also important transition rules which need to be considered.

Should you have any questions, please contact Alexander Chmelev, Arseny Seidov, Maria Kostenko or Roman Bilyk at +7 495 787 27 00.

Baker & McKenzie