Approaches to Control of Transfer Pricing Should Not Be Rejected

Dmitry Medvedev, the Prime Minister of Russia, appealed to the employees of tax authorities not to hurry with the verdict regarding the tax innovations but firstly to evaluate their social and economic consequences. This refers to the control of transfer pricing, as well as to the consolidated groups of taxpayers.


The law improving the pricing principles for tax assessment purposes and the law allowing consolidated groups of taxpayers to be formed were considered in one package, as the latter mitigates the consequences of the first one. The matter is that within the consolidated group the prices for the purpose of tax assessment, as a rule, are not under control.

A consolidated group of taxpayers esteems the taxation base for the corporate tax for the whole group, the group including several companies which can be based in different regions of the country. The tax base is divided among the companies in proportion to two indicators: average headcount (labour costs) and the net book value. Thus, the corporate tax for one business entity, the member of the consolidated group of taxpayers, is payable to the budget of the constituent territory of the Federation where this business entity performs its business activity and not to the one's where it is formally registered.

In principle, that mechanism is quite fair and being generally accepted it is used in the foreign practice for the corporate tax base distribution among the regions or jurisdictions. We use two of three indicators usually taken into consideration for this purpose (except for the sales volume), and such a mechanism is sure not to be a reason for rejecting the normal practice used to control the prices applied by the taxpayers. Moreover, the new approaches to control of transfer pricing comply with the OECD recommendations and the best world practices in this area.

The only serious disadvantage of the new Russian approaches is the thresholds too high for transactions to be considered the controlled ones. As a result, major transactions fall under the new order of control, and the small ones are not under control. It might be probably justified, because control of transfer pricing is rather expensive.

There are some complaints fr om the taxpayers: they do not like that the new standards of transfer pricing control provide for substantial growth of expenses necessary to prepare documentation. This refers to the data related to controlled transactions which the taxpayer must submit upon demand of the tax authority. This also refers to notifications about the controlled transactions to be annually sent to the tax authorities. But along with that, the taxpayers can make pricing agreement with the tax authority, i.e. to preliminarily agree upon the prices applied in the controlled transactions. Also the taxpayers are entitled to establish a consolidated group, and then, as a rule, within such a group the prices for transactions are not controlled.

While discussing the respective draft laws, the taxpayers expressed their desire to have the thresholds for formation of consolidated groups lowered so that the new rules could apply not only to oil & gas and metallurgic sectors but also to communication sector, in particular.

At the same time, these thresholds have a certain function. It should be understood that a new mechanism of tax administration which would be practical to test first, is being implemented. And the simplest way to do it is to implement it at major enterprises. Now it is in the process of getting practical experience. Later the area wh ere the new standards can be applied may be expanded.

T.A. Malinina – Head of Tax Policy Department