The latest and expected changes in Russian and U.S. Transfer Pricing legislation

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1 American Chamber of Commerce in Russia The latest and expected changes in Russian and U.S. Transfer Pricing legislation AmCham's 2015 Annual Tax Conference, 30 October 2015 Dmitry Kulakov, Tax Partner

2 Recent changes in Russian TP legislation New rules for corresponding adjustments New rules on application of corresponding adjustments for Russian counterparties from January 1, 2015 Two options: 1. Upon the audit by 2. Taxpayerinitiated the Federal corresponding Tax Service adjustments 2

3 Recent changes in Russian TP legislation New rules for corresponding adjustments Legislator stipulates the following procedure for performing corresponding adjustments: Corresponding adjustments based on the Federal Tax Authority decision as a result of tax audit Notice received from Federal Tax Service Taxpayer-initiated corresponding adjustments - if counterparty adjusted prices in accordance with the arm s length principle and increased the tax base in tax return Documentation provided by counterparty confirming the adjustment and fulfillment of all counterparty obligations to the state budget for voluntary adjustments 3

4 Recent changes in Russian TP legislation Additional amendments Increased state fee for the examination of Advanced Pricing Agreement - 2 million RUR instead of 1.5 million RUR Changes in Art. 269 of the Tax Code concerning deductibility of interest 4

5 Forthcoming changes in the Russian TP legislation Thresholds for controlled transaction: Domestic transactions - 2 billion RUR Transactions with foreign related parties - 60 million RUR TP audit: TP audit can be conducted based on the information received from the local tax authority including information about possible inconsistencies of prices in controlled transactions with arm s length range Possibility to engage officials of the local Tax authority to conduct TP audits TP Documentation: The taxpayer would not be obliged to prepare TP Documentation in following transactions: The transaction volume does not exceed 5% of the total amount of transactions with this counterparty, and The transaction does not exceed 10 million rubles Use of the median of the arm s length range: Introduction of the median value of the arm s length range Using the median to adjust tax base in tax audit assessments 5

6 TP Developments in US New Competent Authority Revenue Procedure On August 2015 the IRS released the new Revenue Procedures: provides guidance on the process of requesting and obtaining competent authority assistance under the mutual agreement procedure (MAP) Taxpayer-initiated adjustments VS Government actions (audit) provides guidance on advance pricing agreements (APAs) 6

7 TP Developments in US Altera case The Court decided that the all cost rule is invalid as it is inconsistent with the arm s length standard and stock-based compensation costs (SBC) should not be included in cost sharing base of the qualified cost sharing arrangement participants Raises questions with respect to the inclusion of SBC costs as part of the total costs not only for purposes of Treas. Reg (cost sharing), but also Treas. Reg (controlled services transaction) Empirical evidence ( behavioralist interpretation) VS Economic principles ( thought experiment ) 7

8 TP Developments in US Issues raised in the letter from the law makers regarding the OECD advances: 8

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