Korean Embassy Transfer Pricing Seminar TRANSFER PRICING SERVICES
Korean Embassy Transfer Pricing Seminar TRANSFER PRICING SERVICES 4 March 2011
Agenda • Current Russian Transfer Pricing Rules • Expected New Transfer Pricing Law in Russia • Recent Court Practice • Your KPMG Key Contacts in Russia © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1
Current Russian Transfer Pricing Rules • TP regulations exist since its inception in January 1, 1999 but not well developed • Tax Authorities control prices in transactions: – between related parties; - cross-border transactions; - barter transactions; and - transactions where prices fluctuate by more than 20% either side from the market level within a short period of time • Formally there are no documentation requirements (BUT can be useful in case of dispute) • No binding rulings or provisions exist re Advance Pricing Agreements (APAs) • The burden of proof lies with the Tax Authorities © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2
Expected New Transfer Pricing Law in Russia • TP Draft Law passed the first reading BUT, the date when it is expected to come into force is unknown • TP rules will become more detailed and close to international practice • Tax authorities will control prices in related party transactions: a) within Russia: – material related party transactions (> 1 bln RUR in a calendar year) plus – all related party transactions if counterparty benefits from favorable tax regimes or pays MET b) all cross-border related transactions • Tax authorities will control prices in unrelated cross-border transactions only if: - transactions are with commodities; or - counterparty is located in a tax haven jurisdiction • TP documentation becomes compulsory and burden of proof lies with the taxpayer • APAs will be available only for large taxpayers © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
Court Practice We would like to share with you recent court practice in the Russian transfer pricing law: Case 1: Bloomberg case (use of foreign databases for benchmarking searches) Case 2: Mechel case (more than 20% deviation of domestic prices from export prices) Case 3: Agrotorg case (deductibility of royalties) © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4
I. Bloomberg case Bloomberg LLP (Decision of the Federal Arbitration Court of Moscow Region No A 40 -94391/10 -142 -134 of 17 December 2010 ) Access to computer programs (i. e. electronic financial databases) (PE in Russia) Facts • Taxable Profit of PE for 2006 & 2007 FY was calculated and allocated to PE as it was a separate legal entity comparing it to European companies performing similar functions • Search of comparable companies was made in Amadeus database • The search was conducted for the years preceding the years under tax review and did not include years of assessment 3 rd party customers (Russia) Issues • No evidence to support the accuracy of the financial information contained in the Amadeus database • Search was limited to European comparable companies only • Tested period did not include the years under tax review Court’s decision • Ruled in favor of the Russian Tax Authorities © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5
II. Mechel Case (Resolution of the Federal Arbitration Court of Moscow Region No KA-A 40/14051 -10 of 6 December 2010) Germany Mechel Trading AG $X 1*(>1, 2) Russia Taxpayer (Russia) Sale of ferrous ore concentrate Facts • Taxpayer was involved in domestic sales of ferrous ore concentrate to “Mechel Trading House” LLC and export sales to “Mechel Trading AG” Issues • export prices of the ferrous ore concentrate were lower by more than 20% from domestic prices • it was not proved that domestic prices for ore concentrate were influenced by related party relationship and thus, could be used to test the arm’s length nature of export prices $X 1 Mechel Trading House LLC Sale of ferrous ore concentrate Transfer Pricing Law • Article 40 of the Russian Tax Code gives right to the Tax Authorities to review prices in controlled transactions (i. e. transactions where prices deviate > 20% from the market value) Court’s decision • Ruled in favor of the Russian Tax Authorities © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6
III. Agrotorg Case (Decision of the Arbitration Court of St. Petersburg and Leningrad Region No A 56 -22761/2009 of 16 June 2009) Royalty payments for the use of Trademarks Spik Global Limited (Cyprus) OOO “Agrotorg” (taxpayer) Facts • Taxpayer was found to reduce its taxable profit by deducting royalty payments for the use of trademarks under licensing agreement between the taxpayer and “Spik Global Limited” Issues • Expenses were not properly documented and economically justified could not be deducted by the taxpayer Interesting to note • Although, the level of royalty payments was not an issue in this case, the Court accepted as documentary evidence materials prepared by one of the BIG 4 consulting firm, which justified the level of royalty payments Court’s decision • Court ruled in favor of the taxpayer © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7
Your KPMG Key Contacts in Russia Alina Soloviova Partner Tax Department of KPMG in Russia +7 (495) 937 4420 asoloviova@kpmg. ru www. kpmg. ru Alexander Kruglov Manager Tax Department of KPMG in Russia +7 (495) 937 4444 AKruglov@kpmg. ru www. kpmg. ru © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8
Thank you
© 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”).
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