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TP compliance amid current market conditions

Please share your practice with us

We kindly ask you to share your potential concerns regarding TP rules compliance in Russia for 2022.

The position first expressed on 5 March 2022 in Letter No. ShYu-4-13/[email protected] (the “Letter”) is that, in certain cases, a loss-making transaction may be considered “arm’s length” for the purposes of transfer pricing in Russia.

The Letter expressly applies to taxpayers involved in production and export activities as, according to the position of the Russian Federal Tax Service, the application of sanctions to certain Russian citizens and legal entities may, in certain cases, force such taxpayers to sell their goods produced for export at a discount, which may lead to a loss resulting from such transactions. Russian tax authorities will consider such circumstances and the way they affect the conditions and results of controlled transactions when conducting transfer pricing audits.

Thus, if construed literally, the Letter cannot apply to taxpayers involved in other types of intragroup transactions (including import of goods to Russia, performance of work and provision of services, transactions with intellectual property, etc.).

At the meeting of the Foreign Investors Advisory Council with the Russian Federal Tax Service, held on 28 April 2022 with the participation of CMS International B.V. tax experts, foreign businesses proposed to extend the scope of the Letter to a wider range of transactions, taking into account that the current economic situation has significant influence on the operations and profitability of a large number of taxpayers involved in cross-border transactions between related parties. In practice, however, such taxpayer activities and business performance may be affected by both the sanctions directly and the surrounding economic circumstances in Russia.

In response, the Federal Tax Service has expressed its position that it does not see a direct impact from the current economic situation on pricing or profitability for other categories of taxpayers (including those involved in the import of goods, works and services). According to the Federal Tax Service, additional costs, such as those arising from exchange rate volatility and additional logistics costs, are normally passed on to end consumers by routine distributors who therefore, unlike exporters, should not face any losses.

At the same time, the Federal Tax Service is ready to consider additional support measures related to transfer pricing for a wider range of taxpayers based on their specific examples of the impact that the current economic situation is having on pricing and transaction results.

In this context, Maria Kabanova, Senior Associate in the Tax team of CMS International B.V., has initiated gathering information and examples from taxpayers regarding the impact that the current economic situation has had on their economic performance and ability to ensure TP compliance in 2022 and beyond, as well as other TP issues relevant to foreign businesses in Russia. Based on such examples and with the support of professional business associations, we will prepare an aggregated request to the Russian Federal Tax Service (specifying examples of problematic situations but without disclosing the identities of individual taxpayers) and make proposals for resolving the situation.

* In Russian

If this issue is relevant to you, we kindly ask you to contact Maria Kabanova or your trusted contact at CMS International B.V. in any convenient way and share your examples, expectations and concerns regarding TP compliance in the current market environment in Russia, as well as your views on how to deal with this situation.

Key contact

Maria Kabanova
Maria Kabanova
Senior Associate
T +7 495 786 30 40