20.02.07

A new chapter of the Tax Code (TC) on transfer pricing makes almost endless the list of mutually-dependent entities whose operations will be controlled by tax authorities. At the same time, however, the new rules are more similar to international rules, which will simplify business transactions with foreign partners.

In theory, transfer pricing is used by holding companies to manage finances. Some companies find it advantageous to concentrate their profits in one of the holding's member-companies.

But transfer pricing could also be used by companies to minimize taxes. For example, one company of the holding sells merchandise to another (offshore) company at a lower price. The offshore company in turn sells it at market price, but pays lower taxes due to their location.

Now the TC allows tax authorities to control prices in business transactions between mutually-dependent entities, in barter and foreign-trade operations, and in cases where the price has changed more than 20% from prices recently used by the company. Also, if prices differ from the market average by more than 20%, the company will be charged the difference in taxes.

The Ministry of Finance, however, recently prepared a new draft of a TC chapter on transfer transactions.

Now:

1. New criteria of mutual-dependence have been introduced. For example, along with participation in charter capital greater than 20%, official subordination and relative relationship, a criterion of "affiliation" has been introduced. Mutually-dependent companies could be companies in the same holding company even without knowledge of each other; companies which have the same person on the board of directors; and, the most interesting, according to the new anti-monopoly legislation, even competing companies may be called affiliates.
2. Courts will preserve their right to recognize companies as dependent. However, the list of reasons for recognizing companies as dependent will be open. Previously, a court could make a ruling on mutual-dependency only in cases of sales of goods and services.
3. The list of controlled transactions has been changed insignificantly. It includes transactions between mutually-dependent companies, barter and foreign-trade transactions involving property, information and intellectual property, exchange commodities, and with offshore companies. Companies will be obligated to present the tax authorities information on controlled transactions if the income or expense from the transaction with one partner exceeds one million rubles. In such cases, the company will be obligated to disclose information on the transaction, its participants, pricing methods, and income. Concealment of this information will lead to a fine of 5,000 rubles. The information must be presented in the form of a declaration. The Ministry of Finance states that filing such a transfer declaration will release the company from sanctions if taxes must be readjusted.
4. In 2010, companies will also be able to coordinate pricing methodology with the tax authority. Agreements will be made for a period not exceeding three years and will be signed by a head of the FTS or his subordinate. Application for the agreement with tax authorities will cost 1.5 million rubles. Departure from the parameters of the agreement will lead to its annulment. In this case the company will have to pay taxes based on market prices, penalty fees (starting from the day of agreement) and a fine of 1.5 million rubles.

We would like to point out the following: a price variance of 20% from other transactions with the same vendor will no longer be the basis for a review. If homogeneous goods exist in the market, the tax authorities or a company will check whether the price of a transaction deviates from the market price. The maximum and minimum prices of identical or similar goods are taken and the price range is then divided into four equal parts. Both the high and low segments are removed and then the price of the transaction is checked to see whether it varies more than 10% against the remaining middle segment.

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