The President of the Russian Federation has signed a law amending the Tax Code, namely, the section on transfer pricing. This means that transactions between related parties will be conducted according to the new rules.
Expanding the criteria of interdependence
Starting from January 1, 2024, additional grounds for recognizing legal entities as interdependent will be introduced. In addition to the existing criteria set out in article 105.1 of the Tax Code of the Russian Federation, the following will be recognized as interdependent:
Changing the list of controlled transactions
If a transaction is carried out with a foreign entity that is registered in a state included in the list of offshore zones, then such a transaction will also be recognized as controlled one.
The list of transactions that will not be recognized as controlled is also expanding:
Please be reminded that offshore zones are recognized as states or territories with a low tax burden, extended banking and corporate secret, or that do not provide financial information to the Russian tax authorities.
The mechanism of secondary adjustment
The possibility of applying a secondary adjustment of the transaction price is introduced. This provision means that the income of a foreign person, if the actual price of a transaction between related parties differs from the market price and such an actual price is adjusted, will be recognized as dividends and taxed at source. Such income will be recognized on the last day of the calendar year in which the controlled transaction was made.
However, if the taxpayer independently adjusts the tax base, the amount of the adjustment will not be reclassified into dividends, provided that:
or
Expansion of information disclosure requirements in the transfer pricing documentation
Interdependent organizations that carry out controlled transactions have to prepare documentation on the TP and notification of controlled transactions.
According to the amendments, the transfer pricing documentation, in addition to the existing rules, will have to include:
Please be reminded that some of the information could already be indicated in the transfer pricing documentation, however, the changes only consolidate these requirements at the legislative level.
The changes also expand the list of mandatory information that has to be reflected in the notification of controlled transactions. Information is subject to disclosure:
The deadline for submitting a Notification of controlled transactions does not change (not later than May 20, 2024), but it will only be necessary to submit it in electronic form.
Applying the median value
In the case of tax control over transfer prices, the median criterion and the procedure for calculating it are introduced. The median value is applied if the price / profitability of the transaction does not fall within the range of market prices / profitability calculated according to the rules of the Tax Code of the Russian Federation, and the tax base needs to be adjusted. The median value will not be applied in the case of an independent price adjustment by the taxpayer using any transfer pricing method.
Financial statements of foreign participants of the international group of companies
In addition to the basic rules, starting this year, the international group of companies is recognized as a set of organizations in respect of which consolidated financial statements are prepared or such statements would be prepared if securities of any of these organizations and (or) foreign structures without forming a legal entity were admitted to trading on the stock exchange (foreign stock exchange).
The obligation to provide information from the consolidated and financial statements of the international group of companies and the financial statements of the international group of companies participants will also be introduced if all the following conditions are met:
New amounts of fines for transfer pricing
The new changes also affected the amount of fines in case of non-compliance with the requirements of the legislation in the field of transfer pricing. The composition of the offense and the amount of fines are indicated in the comparative table below.
Expanding the criteria of interdependence
Starting from January 1, 2024, additional grounds for recognizing legal entities as interdependent will be introduced. In addition to the existing criteria set out in article 105.1 of the Tax Code of the Russian Federation, the following will be recognized as interdependent:
- individuals or organizations that are recognized as a controlling person and its controlled foreign company (hereinafter referred to as CFC) in accordance with the article 25.13 of the Tax Code of the Russian Federation;
- organizations that are recognized as CFC of the same controlling person in accordance with the article 25.13 of the Tax Code of the Russian Federation;
- organizations, if one individual owns a share of more than 25% and (or) has the authority to appoint a single executive body of the organization (CEO) or at least 50% of the composition of the collegial executive body or the board of directors (supervisory board) of the organization in one organization, and another individual in another organization, and such individuals are recognized as interdependent persons by virtue of family kinship in accordance with sub-clause 11 of clause 2 of the article 105.1 of the Tax Code of the Russian Federation.
Changing the list of controlled transactions
If a transaction is carried out with a foreign entity that is registered in a state included in the list of offshore zones, then such a transaction will also be recognized as controlled one.
The list of transactions that will not be recognized as controlled is also expanding:
- transactions with foreign export credit agencies and foreign organizations engaged in banking activities from jurisdictions with which the Double Taxation Avoidance Agreements have been suspended, provided that the obligations arose before August 8, 2023 and the fact of the absence of interdependence between the debtor (Russian company) and the creditor (foreign organization) is confirmed;
- transactions on the basis of which the debt obligations specified in sub-clause 8, clause 2, article 310 of the Tax Code of the Russian Federation arose;
- transactions with counterparties from jurisdictions with which the Double Taxation Avoidance Agreement has been suspended, provided that:
- the agreements on such transactions were concluded before March 1, 2022
- the procedure for determining prices and (or) pricing methods (formulas) has not changed after March 1, 2022
- as of March 1, 2022, transactions were not controlled in accordance with clauses 1 and 3 of the article 105.14 of the Tax Code of the Russian Federation.
Please be reminded that offshore zones are recognized as states or territories with a low tax burden, extended banking and corporate secret, or that do not provide financial information to the Russian tax authorities.
The mechanism of secondary adjustment
The possibility of applying a secondary adjustment of the transaction price is introduced. This provision means that the income of a foreign person, if the actual price of a transaction between related parties differs from the market price and such an actual price is adjusted, will be recognized as dividends and taxed at source. Such income will be recognized on the last day of the calendar year in which the controlled transaction was made.
However, if the taxpayer independently adjusts the tax base, the amount of the adjustment will not be reclassified into dividends, provided that:
- the foreign person will refund the amount of the adjustment to the taxpayer to their account in a Russian bank before the due date for payment of the relevant tax for the tax period in which the controlled transaction was made
or
- the foreign person will refund the amount of such adjustment to the taxpayer to their account with the Bank of the Russian Federation.
Expansion of information disclosure requirements in the transfer pricing documentation
Interdependent organizations that carry out controlled transactions have to prepare documentation on the TP and notification of controlled transactions.
According to the amendments, the transfer pricing documentation, in addition to the existing rules, will have to include:
- extended information about the foreign counterparty (information on income and expenses, number of employees, amount of profit, cost of fixed assets and intangible assets) for the reporting period in which the transaction was completed. All supporting documents will need to be attached to the information;
- analysis of the commercial and (or) financial conditions of the controlled transaction;
- description of adjustments to ensure the necessary degree of comparability of the financial and (or) commercial terms of the controlled transaction;
- documents containing the registration data of a foreign party to a controlled transaction, and information about persons acting on behalf of the specified person;
- documentary confirmation of information about the functions of the persons who are parties to the transaction, about the assets they use associated with this controlled transaction, and about the economic (commercial) risks they accept, which the taxpayer took into account when concluding it.
Please be reminded that some of the information could already be indicated in the transfer pricing documentation, however, the changes only consolidate these requirements at the legislative level.
The changes also expand the list of mandatory information that has to be reflected in the notification of controlled transactions. Information is subject to disclosure:
- on the terms of transactions, including the basis for the delivery of goods, the date of shipment of goods (the date of transfer of ownership of goods, the date of recognition of income (expense) under the transaction), the subject of which are goods;
- on the transfer pricing methods used and sources of information on comparable transactions in relation to transactions involving goods;
- on the subsequent sale and (or) previous purchase of goods (in relation to goods of world and exchange trade specified in the list of the Ministry of Industry and Trade No. 267.
The deadline for submitting a Notification of controlled transactions does not change (not later than May 20, 2024), but it will only be necessary to submit it in electronic form.
Applying the median value
In the case of tax control over transfer prices, the median criterion and the procedure for calculating it are introduced. The median value is applied if the price / profitability of the transaction does not fall within the range of market prices / profitability calculated according to the rules of the Tax Code of the Russian Federation, and the tax base needs to be adjusted. The median value will not be applied in the case of an independent price adjustment by the taxpayer using any transfer pricing method.
Financial statements of foreign participants of the international group of companies
In addition to the basic rules, starting this year, the international group of companies is recognized as a set of organizations in respect of which consolidated financial statements are prepared or such statements would be prepared if securities of any of these organizations and (or) foreign structures without forming a legal entity were admitted to trading on the stock exchange (foreign stock exchange).
The obligation to provide information from the consolidated and financial statements of the international group of companies and the financial statements of the international group of companies participants will also be introduced if all the following conditions are met:
- the international group of companies has more than 50% of assets in the year preceding the controlled transaction, located in the Russian Federation;
- at least one participant of the international group of Companies has made foreign trade transactions from the List of the Ministry of Industry and Trade No. 267;
- these transactions are controlled.
New amounts of fines for transfer pricing
The new changes also affected the amount of fines in case of non-compliance with the requirements of the legislation in the field of transfer pricing. The composition of the offense and the amount of fines are indicated in the comparative table below.
For questions about the application of tax legislation in the field of TP and the procedure for compiling relevant documentation, please contact Acsour experts.
