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Changes Broaden Meaning of Related Party; Expand Types
of Transactions Covered by Law
Russian tax officials and courts will have wider latitude
in deciding whether Russian enterprises doing business with other entities are related
parties and whether cross-border transactions should face transfer pricing audits under
tax code revisions that became effective Aug. 15. [Federal Law No. 154-FZ, No. 155-FZ,
published 8/6/99]
The changes broaden the definitions of transactions and taxpayers that fall under
Russia's transfer pricing laws. Federal Law No. 154-FZ, published in Rossiskaya Gazeta
Aug. 6, also toughens transfer pricing provisions and makes other substantial changes to
the Tax Code enacted in 1999.
Among the most significant changes, the definition of ''interdependent
parties''--which, if met, allows authorities to target the parties for transfer pricing
issues--has been expanded substantially. Under revisions to the Tax Code's Article 20,
interdependent parties now include those that have a direct or indirect share interest in
one another of more than 20 percent. Under the original law, parties were interdependent
if one had a direct interest in the other and held more than 20 percent of its assets.
Peter Arnett, senior tax manager for Ernst & Young in Moscow, said the changes also
give Russian courts the authority to determine whether two parties are related. If the
court decides the relationship between two parties might have a bearing on the results of
transactions between them, it can declare the two parties interdependent, he said. ''Under
a literal reading of Article 20, any transaction in theory can result in interdependence
of the parties that enter into it, whether or not according to Organisation for Economic
Co-operation and Development rules or common sense they are actually related,'' Arnett
said.
Andrei Plugar, senior tax manager for Deloitte Touche Tohmatsu in Moscow office,
agreed. "The new version of Article 20 gives courts broader authority in determining
that parties are related for purposes of taxation, even when they do not meet the
characteristics of 'related parties' listed in the first paragraph of the article. Any
relationships that courts deem may have influence on transactions can be
scrutinized," he said.
Taxpayers Face Vague New 'Draconian' Transfer Pricing
Law
Russian taxpayers are facing the prospect of having to comply with tough, rigid
transfer pricing requirements without a clear understanding of the regulations' terms and
requirements, according to a Moscow-based practitioner.
Tax authorities in Russia, meanwhile, are planning to increase transfer pricing
enforcement substantially within the next few years, practitioners said. Taxpayers should
prepare for audits under the nation’s new transfer pricing law, which become
effective Jan. 1, 1999, they warned.
President Yeltsin signed the new Russian tax code into law July 31. A translation of
Article 40, the section of the law that deals with transfer pricing, appears in the Full
Text section of the November 25, 1998 Transfer Pricing Report. [there could
be a link here to an order form, do we have the information to do this? If not, just leave
it out.]
Draconian Rules
Jay Shim with PricewaterhouseCoopers in Moscow said the new transfer pricing law is
"fairly draconian, and yet it’s not clear how the tax authorities are going to
implement the rules"
Article 40 requires that taxes on transactions with "mutually dependent
persons" be calculated as if the transactions occurred at market price. Market price
is defined as the natural interaction of supply and demand between unrelated parties with
respect to similar goods and services in an identical or similar market. Special rules
would be applied to specific types of transactions involving financial instruments,
commercial loans, and futures contracts, among others. Goods, works or services may be
taxed in Russia as though they were sold at market prices, whether or not they actually
were.
Practitioners who deal with Russian tax law said a taxpayer will be able to present
evidence, as yet unspecified, justifying its use of a particular "market price"
in calculating its income for the taxation of transactions with related entities.
High Level Awareness
Svetlana Almakaeve, a former Russian tax inspector now with Loyens & Volkmaars in
Rotterdam, the Netherlands, said the fact that authorities have included transfer pricing
rules in the new tax law "shows they’re aware that they do lose significant tax
revenue in this area." While at least the upper reaches of government are aware of
the importance of transfer pricing, local tax inspectors are not as conscious of the
issue, she said. "Now, it’s a high-level awareness. It will take time before tax
inspectors will enforce it," she concluded.
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