Transfer Pricing tax inspection: How to prepare? - Transition period is finished! - It is not just a fine of 5 000 RUR… - Actions to take in 2014 - TP-documentation of the Group - Identification of controlled transactions - Comparability analysis: price or profitability? - Tax recalculation based on market prices - Notification of controlled transactions - TP-documentation: choice of the method - TP-documentation: comparable analysis of profitability - TP-documentation: estimation of profitability

1. TRANSFER PRICING TAX
INSPECTION: HOW TO PREPARE?
St. Petersburg 17/06/2014
Olga Mazina,
Deputy Director of Accounting Service Department, Tax Advisor
www.accountor.ru

2. 2 17.6.2014
Transfer Pricing tax inspection:
How to prepare?
- Transition period is finished!
- It is not just a fine of 5 000 RUR…
- Actions to take in 2014
- TP-documentation of the Group
- Identification of controlled transactions
- Comparability analysis: price or profitability?
- Tax recalculation based on market prices
- Notification of controlled transactions
- TP-documentation: choice of the method
- TP-documentation: comparable analysis of profitability
- TP-documentation: estimation of profitability

3. 3 17.6.2014
Transition period is finished!
- Law on Transfer Pricing has been effective since 2012 (Federal Law 227-FZ of
18/07/11)
- 2012-2013 – transition period: notifications, preparation of TP-documentation and tax
checks – only for companies which turnover for controlled transactions exceeded the
limits of 100 mln.RUR (in 2012) and of 80 mln.RUR (in 2013).
- Since 2014 – no limitations. Concerning all transactions with foreign associated
entities the following rules shall be observed:
- Notification on controlled transactions shall be sent to Tax Office annually till 20th of
May
- Tax check can be started since the 1st of June of 2015!
- TP-documentation must be submitted to the Tax Office within 30 days after request

4. 4 17.6.2014
It is not just a fine of 5 000
RUR…
- General approach to taxation in controlled transactions: incomes which
are not received for the reason of difference between the Transfer
Price and the Market price are taxable.
Tax shall be recalculated only if recalculation does not result in
decrease of tax
- Fine for failure to submit Notification of controlled transaction – 5000
RUR
- Fine for understatement of tax due to application of Transfer Prices not
corresponding to the market level – 40% of unpaid tax,
minimum – 30 000 RUR.
- Fine shall not applied in case if TP-documentation justifying Transfer
Prices applied is available!

5. 5 17.6.2014
Actions to take in 2014
Step 1: Identification of associated entities and controlled transactions
Step 2: Comparability analysis of Transfer Prices and Market Prices
Step 3: Recalculation of taxes based on a market price
Step 4: Notification of controlled transactions to Tax Office till 20th of May of
2015
Step 5: Preparation of Transfer Pricing documentation justifying Transfer Prices
applied

6. 6 17.6.2014
TP-documentation of the Group
- Some companies have TP-documentation developed in the Group
- As a rule it is documentation about the general concept on pricing
applicable in the Group, but this does not justify prices in certain
transactions with Russian branches
- Russia has its rules for TP-justification which differ from listed in
OECD-TP-Guidelines
- Tax Code of RF lists 5 methods of TP-justification, which Tax Office
uses while tax check
- Transfer Prices should be compared to the market level regularly
- TP-documentation of the Group can be adopted for use in Russia

7. 7 17.6.2014
Identification of controlled
transactions
- Dependence is defined by the rules established in Tax Code of Russia
Mother –Daughter:
Companies A and B are interdependent if Company A directly/indirectly owns more
than 25% of Company B
Sister companies:
Companies A and B are interdependent if Company C directly/indirectly owns more
than 25% of A and B
- Structure of the Group may be so brunched that companies are not able to calculate
percentage of ownership by themselves
- Even for long chains of ownerships percentage can meet the criterion of Tax Code of
RF
- Interdependence is not only sharing, but also common management
- Calculation of turnover for controlled transactions: 80 millions RUR – for transactions
with all Group companies
- Loans: only interests are included

8. 8 17.6.2014
Comparability analysis: price or
profitability?
- Only public sources of information can be used
- Available databases:
SPARK.INTERFAX
ORBIS
AMADEUS
TP Specialist
Thomson Reuters, etc.
- How to find information about similar transactions in the market?
If your product is unique…
Trade marks influence…
- Another option: Comparability analysis of profitability with indexes of other
companies which have the same kind of business

9. 9 17.6.2014
Tax recalculation based on
market prices
- Market price / profitability is defined as an interval
- If your Transfer Prices or Profitability fall within market interval – tax
recalculation is not needed
- If your profitability is outside the market interval - pay additional taxes.
Income tax shall be recalculated upon results of the year.
- Taxes should be recalculated only in case if they are underpaid due to
applied Transfer Prices

10. 10 17.6.2014
Notification of controlled
transactions
- Format and instructions for filling in are issued by authorities (Order of
Ministry of Finance of 27/07/12 No MMV-7-13/524@)
- Notification contains information about sides of controlled transactions
and Transfer Prices applied
- Practice proved that volume of the Notification can be big. Trading
companies which have contracts in foreign currency (e.g. EUR)
declare prices of each item per each delivery
- IT-support eases the work
- If stock accounting is organized in Navision, SCALA, etc. IT-support for
making of Notification is necessary

11. 11 17.6.2014
TP-documentation: choice of the
method
- Methods of TP-justification offered by Tax Code of RF:
1. Comparable uncontrolled price method
2. Resale price method
3. Cost method
4. Comparable profitability method
5. Profit distribution method
- Method of comparable market prices is the primary, but hardly applicable
- For trading companies - Resale price method. Profitability of all sales
operations have to be compared to the market level – special reports on
margin are needed.
- The most realistic approach – comparability analysis of profitability
- Combinations of methods can be used

12. 12 17.6.2014
TP-documentation: comparable
analysis of profitability
- Tax Code of RF allows to use different profitability indexes:
For Resale price method
Gross margin = Gross profit / revenue
For Cost method
Gross profitability of costs = Gross profit / cost of sales
For Comparable profitability method
Profitability of sales = Operating profit / revenue
Profitability of costs = Operating profit /(cost of sales + commercial and management
costs)
Profitability of commercial and management costs = Gross profit / (commercial and
management costs)
Profitability of assets = Operating profit / assets
- Profitability is calculated based on the Profit & Loss Statement
- Unprofitable companies can apply these methods in case if they have income from
operating activity

13. 13 17.6.2014
TP-documentation: estimation of
profitability
- Profitability of the company is compared to the market interval of profitability
- Market interval is formed on the basis of Statistical information contained in special
databases (e.g. SPARK-Interfax, ORBIS, AMADEUS etc.). Since 2013 companies
are obliged to send annual financial statements to Committee of Statistics.
- It is needed to form a sampling of companies which meet criterion listed in
Tax Code of RF:
kind of economic activity
positive NET ASSETS
no losses for more than 1 year for which profitability is calculated
share of other companies and in other companies – less 25%
- Technically it is possible to select companies by other criterion
- Check your profitability, choose the index which fits you the best, prepare TP-documentation

14. Thank you for your attention!
St. Petersburg, 17/06/14
14 17/6/2014