Anna Butenko, Russin &
Vecchi, Moscow
Vadim Dmitriev, Ukrainian Legal
Group, Kiev
Before the new Tax Code came into force on January 1, 1999 (hereinafter – “the Tax Code”), transfer-pricing rules had been found in laws relating to the taxation of entities and to value-added tax. Tax authorities could adjust the taxable base in two situations: if prices were found below costs, and in barter transactions. The market price was linked to cost.
Article 40 of the Tax Code changes the situation dramatically. First, it establishes the principle that the
tax will be based on the contract price.
The contract price is deemed to be the market price, unless proved
otherwise. Second, the Tax Code
indicates that the tax authority can review and, if necessary, adjust prices in
the following four cases: (1) if the
transaction is concluded between interdependent persons, (2) in barter
transactions, (3) in international transactions, and (4) if the level of prices
used by the taxpayer for identical (similar) goods fluctuates by more than 20%
over a short period of time. It should
be noted that, before the Federal Law on Amendments to the Tax Code
(hereinafter – “Tax Code Amendments”) was adopted on July 9, 1999, the Tax Code
had required that the level of prices fluctuate more than by 30%, and had not
granted tax authorities the right to review and adjust prices in international
transactions.
The above-mentioned Tax Code Amendments also broadened the term
“interdependent persons”. It now
includes those situations in which one party participates directly or
indirectly in the other and the share of this participation is more than
20%. The earlier version of the Tax
Code connected the interdependence of parties only to the direct participation
of one party in another with a participation share of more than 20%. It should be noted that the court, while
determining “interdependence”, is authorized to consider other circumstances if
these can influence the results of the transaction, i.e., the court is granted
the right to broadly construe the notion of “interdependent parties”.
Methods of Calculation of the
Taxable Base
Tax authorities may use several methods to calculate market prices. The principal method is based on the comparison of the contract price with the price of identical (similar) goods in the market (Comparable Price Method). Article 40 of the Tax Code contains provisions determining what the market for the goods is, what goods are considered to be similar, what goods are considered to be identical, what kind of information should be used in such calculations, with what transactions comparisons should be made, etc. The tax authority should comply with these provisions when reviewing and adjusting prices.
If the Comparable Price Method cannot be applied because
of the absence of certain transactions or certain goods in the market, or due
to an unavailability of information, the following two methods (known as
“specific methods”) can be applied: the Subsequent Sale Price Method, in which
the market price is calculated based on the price at which the goods were
subsequently sold (resold), or the Cost Plus Method, whereby the market price
is calculated as the sum of costs incurred plus the price markup. The Cost Plus Method can be applied when
both the Comparable Price Method and the Subsequent Sale Method prove
inapplicable. All three methods are
applied regardless of whether the property is tangible or intangible. It also
should be noted that there is no bias against transactions with particular
countries.
Customs Authorities
and Recalculation of Price of Goods.
According to Article 30 (2) of Tax Code, customs authorities are granted the powers of tax authorities in cases described by the Tax Code. Pursuant to Article 82 of the Tax Code, customs authorities exercise control over compliance with tax legislation, and have rights and bear liabilities provided for in the chapter on the control of tax authorities. For the purposes of the last article, customs authorities can exercise control over the correctness of prices, as provided for in Article 40 of the Tax Code. The taxpayer is not granted the right to defend transfer prices in an income tax audit on the basis that the prices were accepted for customs purposes.
Consequences of Recalculation of
Taxable Base. Penalties.
If the tax authority decides that the prices of goods (works, services) used by parties differ by more than 20% from the market price of identical (similar) goods, it can issue a reasoned decision to collect underpaid taxes and the late payment of interest, as if the results of the transaction were established based on market prices. The late payment of interest is recovered in the amount of one three-hundredth of the actual refinancing rate of the RF Central Bank for each overdue day.
Russian legislation does not provide for special penalties to be paid as
a result of recalculation of the taxable base.
General provisions on tax penalties, contained in the Tax Code, oblige
the taxpayer, in the case of non-payment and underpayment of taxes resulting
from an incorrect calculation of taxes, to pay a penalty in the amount of 20%
of the sum underpaid. If this
under-calculation of the taxable base or incorrect calculation of taxes is
intentional, the penalty is 40% of the sum underpaid. In cases where under-calculation of the taxable base or incorrect
calculation of taxes results from a gross violation of the rules for accounting
of income and loss and objects of taxation, the penalty is 10% of the sum
underpaid. The Tax Code provides for
several mitigating factors, in which case the penalty is diminished by
50%. In the case of repeated commitment
of a similar tax violation, the penalty is increased by 100%.
In accordance with the Tax Code, collection of taxes from enterprises requires a court decision only in cases of alteration of juridical qualification of a transaction or juridical qualification of the status or activity of the taxpayer. The collection of taxes under restructured transactions is carried out by tax authorities directly and requires no court decision. Late payment of interest is collected in the same manner. However, penalties can be imposed only by a court decision. If the taxpayer does not agree with the decision of a tax authority on the recalculation of the taxable base, this decision can be appealed, either to a higher-level tax authority or to a court, or both.