Multinational groups of companies (“MGCs”), as defined in Russian law, will face new transfer pricing (“TP”) reporting obligations starting from 2018 in relation to their activities in 2017 (the first reporting period).This change results from a Federal Law* (the “Law”) whose provisions are, to a large extent, based on OECD principles.
The new obligations increase the amount of data on MGCs and their members that will be disclosed to the Russian tax authorities. This may increase the possibility and scope of TP control and corresponding additional tax accruals.
Overview of the three-tier system of TP documentation in Russia
Definition and scope
The three-tier system of TP documentation filing, according to the Law, is meant for Russian taxpayers who form part of an MGC.
An MGC, as defined by the Law, is a group of legal entities and/or foreign structures that are not recognised as legal entities, which are interrelated through participations in the charter capital and/or management control. A group qualifies as an MGC if it meets all of the following conditions simultaneously:
- it prepares consolidated financial statements in accordance with the accounting legislation or the requirements of any stock exchange applicable to listed companies;
- it includes at least one Russian tax resident or a foreign company that is subject to taxation in Russia through a permanent establishment; and
- it includes at least one company that is not recognised as a Russian tax resident or is subject to taxation outside Russia through a permanent establishment.
The new reporting obligations apply to MGCs that have total revenues in excess of RUB 50bn (approx. EUR 72.5m) in a financial year, unless other financial criteria are prescribed by the national legislation in the country of incorporation of their ultimate parent companies. If the ultimate parent company of an MGC is a foreign tax resident, the revenue threshold set by the legislation in the country of incorporation of the ultimate parent company applies instead.
The ultimate parent company is defined as a member of an MGC (i) which directly or indirectly participates in the charter capital of the other participants of the MGC or otherwise controls the other participants, and (ii) its participation share in the MGC is sufficient to include the financial statements of the other members of the MGC in its consolidated financial statements. The two elements of this definition are, in our view, contradictory. This is because exercising control over the other entities in forms other than through participation in charter capital normally does not lead to the obligation to include the financial statements of such “controlled entities” in consolidated financial accounting statements. So far, there is no court practice or other explanation on how to resolve this contradiction.
An authorised representative (the equivalent of Surrogate Parent Entity) is a member of an MGC that is appointed by the ultimate parent company as a unit responsible for filing a country report in the name of the MGC.
Types of reporting
Under the Law, the members of an MGC are obliged to file the following new types of TP reporting:
- notification of their participation in the charter capital of an MGC;
- country data, including:
- CbCR (Country-by-country report);
- global documentation (Master file); and
- national documentation (Local file).
Notification of participation in an MGC
A notification is filed by Russian taxpayers who are members of an MGC in a prescribed form and should contain information on all the taxpayers that are parts of the MGC.
Person responsible for filing the report | The MGC members who are Russian taxpayers |
Exemption grounds | If the notification was filed in Russia by the ultimate parent company, the authorised representative or other person bearing such obligations based on the decision of the group |
First reporting period | 2017 (with an option of voluntary filing for 2016) |
Filing terms | Eight months from the end date of the reporting period (i.e. by 31 August 2018 for FY 2017) |
Contents and format | Registration data (name, address, tax identification number, etc.) on each taxpayer, ultimate parent company and authorised representative of the MGC, etc. The notification is filed electronically in a prescribed form.
The notification is filed in Russian language. |
Liability for failing to file the relevant report | A RUB 50,000 fine (approx. EUR 725), with a moratorium until 2020 |
CbCR
A CbCR filing is obligatory in Russia if the ultimate parent company of the MGC is a Russian tax resident, but may in certain cases be requested as well from all the other Russian taxpayers that are parts of the MGC.
The CbCR should reflect a large amount of financial and administrative information on each member of the MGC (both Russian and foreign tax residents).
Person responsible for filing the report | - The MGC’s ultimate parent company who is a Russian tax resident;
- an authorised representative, provided such representative is a Russian tax resident; or
- any member of an MGC who is a Russian tax resident (upon the request of the tax authorities or at the taxpayer’s election).
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Exemption grounds | If the CbCR in relation to the MGC concerned was filed by: - the ultimate parent company or its authorised representative, who are Russian tax residents; or
- the ultimate parent company or its authorised representative, who are tax residents of a country that automatically exchanges information with Russia.
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First reporting period | 2017 (with an option of voluntary filing for 2016) |
Filing terms | 12 months from the end date of the reporting period (i.e. by 31 December 2018 for FY 2017) or upon the request of the Federal Tax Service |
Contents and format | Financial information as stipulated in the countries of incorporation of the MGC members.
The CbCR is filed electronically in a prescribed form.
The CbCR is filed in Russian language if the ultimate parent company of the MGC is a Russian tax resident.
The CbCR may be filed in a foreign language if the ultimate parent company of the MGC is a foreign tax resident. |
Liability for failing to file the relevant report | A RUB 100,000 fine (approx. EUR 1,450), with a moratorium until 2020 |
Global documentation
Global documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC. There are no requirements as to the form of such documentation but it would include information on the structure of the group, its business activity and key transactions, etc.
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Person responsible for filing the report | The MGC members who are Russian taxpayers |
Exemption grounds | If the global documentation was filed in Russia by another MGC member for the same period
2017 |
First reporting period | Upon the request of the Federal Tax Service, but not earlier than 12 months and not later than 36 months from the end of the reporting period (i.e. from 1 January 2019 until 31 December 2020 for FY 2017) |
Filing terms | Information on the MGC’s participation structure, market conditions of its activity (including description of products, markets, key success factors), as well as functional analysis, key transactions, etc. |
Contents and format | There are no requirements as to the form in which the global documentation is to be filed save that it must be filed in Russian language (a version in a foreign language may be filed in addition). |
Liability for failing to file the relevant report | A RUB 100,000 fine (approx. EUR 1,450), with a moratorium until 2020 |
National documentation
National documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC that is participating in cross-border transactions with the other MGC members. There are no requirements as to the form of such documentation but it should contain certain additional data in comparison with the standard TP documentation filed by all the Russian taxpayers that have participated in controlled transactions since 2012.
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Person responsible for filing the report | The MGC members who are Russian taxpayers in relation to controlled transactions with the foreign MGC members |
Exemption grounds | None |
First reporting period | 2018 |
Filing terms | Within 30 days of a request from the Federal Tax Service.
Documentation may be requested not earlier than 31 December of the year following the reporting year (2018-2019) and not earlier than 1 June of the year following the reporting year starting from 2020. |
Contents and format | Information on the controlled transactions of any MGC member, which is similar to that provided in the standard TP documentation.
Regarding the transactions performed with the other MGC members, the following information and documents should also be provided: - data on the management bodies and persons who receive the management’s accounting information;
- data on the taxpayer’s activity (including the description of the market conditions);
- copies of the material agreements between the MGC members that influence the price formation in controlled transactions;
- copies of the advanced pricing arrangements, tax rulings of foreign competent authorities that were prepared without the involvement of the Russian tax authorities; and
- auditor’s report on the accounting (financial) statements of the taxpayer.
There are no requirements as to the form in which the national documentation is filed save that it must be filed in Russian language (a version in a foreign language may be filed in addition). |
Liability for failing to file the relevant report | A RUB 100,000 fine (approx. EUR 1,450), starting from 2018 |
Our recommendations
With the Law now in force, we would recommend that Russian taxpayers take the following steps:
- Make a preliminary assessment of whether the new requirements may apply to the group’s existing and planned controlled transactions.
- If such new requirements apply, start preparing the information that should be filed with or may be requested by the Russian tax authorities.
- Implement a data collection procedure with the group’s foreign entities and start collecting such information.
- Review the group’s existing TP documentation in light of the new requirements and make any necessary amendments to it.
* In Russian
01/2018
Multinational groups of companies (“MGCs”), as defined in Russian law, will face new transfer pricing (“TP”) reporting obligations starting from 2018 in relation to their activities in 2017 (the first reporting period).This change results from a Federal Law* (the “Law”) whose provisions are, to a large extent, based on OECD principles.
The new obligations increase the amount of data on MGCs and their members that will be disclosed to the Russian tax authorities. This may increase the possibility and scope of TP control and corresponding additional tax accruals.
Overview of the three-tier system of TP documentation in Russia
Definition and scope
The three-tier system of TP documentation filing, according to the Law, is meant for Russian taxpayers who form part of an MGC.
An MGC, as defined by the Law, is a group of legal entities and/or foreign structures that are not recognised as legal entities, which are interrelated through participations in the charter capital and/or management control. A group qualifies as an MGC if it meets all of the following conditions simultaneously:
The new reporting obligations apply to MGCs that have total revenues in excess of RUB 50bn (approx. EUR 72.5m) in a financial year, unless other financial criteria are prescribed by the national legislation in the country of incorporation of their ultimate parent companies. If the ultimate parent company of an MGC is a foreign tax resident, the revenue threshold set by the legislation in the country of incorporation of the ultimate parent company applies instead.
The ultimate parent company is defined as a member of an MGC (i) which directly or indirectly participates in the charter capital of the other participants of the MGC or otherwise controls the other participants, and (ii) its participation share in the MGC is sufficient to include the financial statements of the other members of the MGC in its consolidated financial statements. The two elements of this definition are, in our view, contradictory. This is because exercising control over the other entities in forms other than through participation in charter capital normally does not lead to the obligation to include the financial statements of such “controlled entities” in consolidated financial accounting statements. So far, there is no court practice or other explanation on how to resolve this contradiction.
An authorised representative (the equivalent of Surrogate Parent Entity) is a member of an MGC that is appointed by the ultimate parent company as a unit responsible for filing a country report in the name of the MGC.
Types of reporting
Under the Law, the members of an MGC are obliged to file the following new types of TP reporting:
Notification of participation in an MGC
A notification is filed by Russian taxpayers who are members of an MGC in a prescribed form and should contain information on all the taxpayers that are parts of the MGC.
Person responsible for filing the report
The MGC members who are Russian taxpayers
Exemption grounds
If the notification was filed in Russia by the ultimate parent company, the authorised representative or other person bearing such obligations based on the decision of the group
First reporting period
2017 (with an option of voluntary filing for 2016)
Filing terms
Eight months from the end date of the reporting period (i.e. by 31 August 2018 for FY 2017)
Contents and format
Registration data (name, address, tax identification number, etc.) on each taxpayer, ultimate parent company and authorised representative of the MGC, etc.
The notification is filed electronically in a prescribed form.
The notification is filed in Russian language.
Liability for failing to file the relevant report
A RUB 50,000 fine (approx. EUR 725), with a moratorium until 2020
CbCR
A CbCR filing is obligatory in Russia if the ultimate parent company of the MGC is a Russian tax resident, but may in certain cases be requested as well from all the other Russian taxpayers that are parts of the MGC.
The CbCR should reflect a large amount of financial and administrative information on each member of the MGC (both Russian and foreign tax residents).
Person responsible for filing the report
Exemption grounds
If the CbCR in relation to the MGC concerned was filed by:
First reporting period
2017 (with an option of voluntary filing for 2016)
Filing terms
12 months from the end date of the reporting period (i.e. by 31 December 2018 for FY 2017) or upon the request of the Federal Tax Service
Contents and format
Financial information as stipulated in the countries of incorporation of the MGC members.
The CbCR is filed electronically in a prescribed form.
The CbCR is filed in Russian language if the ultimate parent company of the MGC is a Russian tax resident.
The CbCR may be filed in a foreign language if the ultimate parent company of the MGC is a foreign tax resident.
Liability for failing to file the relevant report
A RUB 100,000 fine (approx. EUR 1,450), with a moratorium until 2020
Global documentation
Global documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC. There are no requirements as to the form of such documentation but it would include information on the structure of the group, its business activity and key transactions, etc.
Person responsible for filing the report
The MGC members who are Russian taxpayers
Exemption grounds
If the global documentation was filed in Russia by another MGC member for the same period
2017
First reporting period
Upon the request of the Federal Tax Service, but not earlier than 12 months and not later than 36 months from the end of the reporting period (i.e. from 1 January 2019 until 31 December 2020 for FY 2017)
Filing terms
Information on the MGC’s participation structure, market conditions of its activity (including description of products, markets, key success factors), as well as functional analysis, key transactions, etc.
Contents and format
There are no requirements as to the form in which the global documentation is to be filed save that it must be filed in Russian language (a version in a foreign language may be filed in addition).
Liability for failing to file the relevant report
A RUB 100,000 fine (approx. EUR 1,450), with a moratorium until 2020
National documentation
National documentation may be requested by the Russian tax authorities from any Russian taxpayer who is a member of an MGC that is participating in cross-border transactions with the other MGC members. There are no requirements as to the form of such documentation but it should contain certain additional data in comparison with the standard TP documentation filed by all the Russian taxpayers that have participated in controlled transactions since 2012.
Person responsible for filing the report
The MGC members who are Russian taxpayers in relation to controlled transactions with the foreign MGC members
Exemption grounds
None
First reporting period
2018
Filing terms
Within 30 days of a request from the Federal Tax Service.
Documentation may be requested not earlier than 31 December of the year following the reporting year (2018-2019) and not earlier than 1 June of the year following the reporting year starting from 2020.
Contents and format
Information on the controlled transactions of any MGC member, which is similar to that provided in the standard TP documentation.
Regarding the transactions performed with the other MGC members, the following information and documents should also be provided:
There are no requirements as to the form in which the national documentation is filed save that it must be filed in Russian language (a version in a foreign language may be filed in addition).
Liability for failing to file the relevant report
A RUB 100,000 fine (approx. EUR 1,450), starting from 2018
Our recommendations
With the Law now in force, we would recommend that Russian taxpayers take the following steps:
* In Russian