Transfer pricing compliance in Russia. Part 3. Stages of transfer pricing compliance

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Dentons’ Tax and Customs practice congratulates its clients and friends on the end of the first stage of transfer pricing compliance for 2016 – the filing of the notification of controlled transactions completed in 2016!

Now the second stage is coming: preparation of transfer pricing documentation. It’s time to contact us at Dentons’ Tax practice!


Considering that in practice intragroup prices are much more often checked not by the Federal Tax Service of Russia in controlled transactions but by the local tax authorities in uncontrolled transactions (see pages 46-47 of the Federal Tax Service of Russia’s official report), in the second stage we recommend that our clients develop substantiation in advance:

  • Not only for controlled transactions in the format of Transfer Pricing Documentation (Art. 105.15 of the RF Tax Code);
  • But also for uncontrolled transactions that may cause the tax authorities to suspect price manipulation of intragroup transaction prices, for example, loss-making transactions, uncompensated issuance of suretyships, lease, license and sub-license agreements.
  • The format and structure for substantiating prices in this case may be simpler than the Transfer Pricing Documentation. What is important is that it shows the business objectives of the transactions and arguments for the pricing actually applied.

However, the most strategically important stage of transfer pricing compliance is adapting the group’s international transfer pricing policy to the Russian context for international companies (developing a transfer pricing policy for Russian companies). This third stage will make it possible to not have to justify the terms of already completed transactions after the fact, but to diagnose possible problems at the stage of entering into intragroup transactions and to minimize (anticipate) related risks.

Thus, the usefulness and effectiveness of transfer pricing compliance measures for the taxpayer is inversely proportional to their mandatory nature:

  • Only the first stage is mandatory, although the price of errors in a notification is not more than RUB 5,000 and the hypothetical risk of attracting the attention of the tax authorities in a tax audit.
  • Errors at the second stage or underestimating its importance and completing transactions without developing proper substantiation may cost your business much more, especially at a time when penalties have almost doubled (see Federal Law No. 401-FZ) and fines on controlled transactions are doubled (up to 40%) from 2017.
  • Finally, persistent mistakes in setting the prices of key transactions for the business may become the price of disregarding preventive control over intragroup pricing. The consequences of such errors, especially those that cannot be corrected after the fact at the second stage, can be catastrophic.

Such a multifaceted approach makes it possible to control pricing risks and maintain an all-around defense taking into account the legislation, international approaches and the Russian practice of applying the laws:

At the same time, the most common error made at the second and third stages is to uncritically use samples and templates, often those prepared in a group of companies immediately after the adoption of Section V.1 of the RF Tax Code based on international approaches/a global transfer pricing policy that are/is appropriate at the time. Whereas such a position could be justified five years ago because there was no other practice, today it may do more to harm than help, as it gives management the illusion that intragroup pricing is protected from tax audits.

As a result, cases are widespread in the practice of pricing audits of transfer pricing where Transfer Pricing Documentation is used against the taxpayers who have submitted it, for example, because they contain “in passing” information that contradicts the taxpayer’s main stated position, the selection of the TP method, tested party and net margin indicator.

Transfer Pricing Documentation that has “frozen” at the level of 2012 methodology (even though the global transfer pricing toolkit has considerably “matured” recently) can also often be seen. The technical performance of such sets of Transfer Pricing Documentation deteriorates entirely over time. This happens if document updating is confined to a new benchmark that from year to year is entrusted to ever less experienced employees with the request to “make it according to the sample.” The following may be symptoms of such an approach:

  • The set of comparable companies do not change from year to year.
  • Only the deductive approach (downloading from databases) is used to find comparable companies without using the additive approach (detailed analysis of manually selected comparable companies).
  • There are no strict uniform comparability criteria, which often masks that the selection of companies is being “adapted” to confirm the desirable “arm’s length” range.
  • There are no additional criteria for checking the comparability of companies, for example, diagnostic (financial) ratios (pages 48-49 of the Transfer Pricing Toolkit, see section 6.3.1 on the link).
  • Failure to use internationally recognized adjustments, in particular, working capital adjustments to determine a return on sales arm’s length range for a trading company.

For this reason it is vitally important to keep up with the times and update the Transfer Pricing Documentation and Transfer Pricing Policy not just to “check the box,” but meaningfully, taking into account both the change of business processes in your company and the development of approaches to transfer pricing around the world, the intensification of information exchange, including CbCR, and the development of court practice.


The lawyers and tax compliance specialists of Dentons’ Tax and Customs practice have considerable transfer pricing experience acquired working in key sectors of the Russian economy such as oil and gas, metals, construction, agriculture, chemicals, mechanical engineering, pharmaceuticals, banking, insurance, FMCG, DIY, IT, and in services:

  • Advising, including on preparing transfer pricing documentation and policies, structuring intragroup deals and carrying out corporate restructurings
  • Handling tax disputes both under the rules of Article 40 of the RF Tax Code (so-called “old” Russian TP rules) and under the rules of Section V.1 of the RF Tax Code (so-called “new” Russian TP rules), including before the RF Supreme Court and when supporting tax audits under Article 105.17 of the RF Tax Code (special TP audits performed by Federal Tax Service)

and would be happy to apply this experience to identify and minimize risks with due account for the specifics of your situation and modern approaches to transfer pricing.