Should companies prepare transfer pricing documentation for 2019 if revenues under transactions with foreign related parties are under RUB 60 million?
Transactions with foreign related entities have been recognized controlled transactions since 2019 if the annual revenues under such transactions do not exceed RUB 60 million (Article 150.14(3) Russian Tax Code).
Many companies would like to know whether they should prepare transfer pricing documentation if the revenues they derived in 2019 from transactions with foreign related parties did not exceed RUB 60 million.
Brief answer: If revenues from transactions with foreign related parties do not exceed RUB 60 million per year, companies are no longer required to include such transactions in the controlled transaction reports to be filed with tax authorities. Nevertheless, according to the general rule set out in the Russian Tax Code, transactions with related parties should be taxed based on market prices regardless of the amount of revenues (expenses) derived by companies under such transactions. If the difference between transfer prices and market prices results in tax underpayment, companies could be fined, so we recommend checking transfer prices for compliance with market prices and justifying them in transfer pricing documentation every year.
We have considered below what the point in preparing transfer pricing documentation is in various situations. We have also identified the groups at risk of transfer price verifications:
- Why prepare transfer pricing documentation for any transactions with related parties;
- Why prepare transfer pricing documentation if revenues under transactions exceed RUB 60 million;
- Why prepare transfer pricing documentation if revenues under transactions are under RUB 60 million;
- Groups at higher risk of transfer pricing verifications.
Transfer pricing documentation if revenues under transactions exceed RUB 60 million
If revenues under transactions with related parties exceed RUB 60 million per year:
- Such transactions will be recognized as controlled transactions, and a controlled transaction report will need to be filed with tax authorities.
- The Federal Tax Service in Moscow will check the prices applied under such transactions.
- In case of verification, the inspected company is to submit transfer pricing documentation to the Federal Tax Service. It should also be noted that companies will not be fined 40% of arrears if transfer pricing documentation is available.
Following the introduction of the RUB 60 million threshold, the number of companies subject to verification by the Federal Tax Service has decreased while the likelihood of verification has increased. Companies that did not prepare transfer pricing documentation in the past are now at greater risk, so we recommend preparing justifications of transfer prices as per the requirements of the Russian Tax Code.
Transfer pricing documentation if revenues under transactions are under RUB 60 million
If the amount of transactions with related parties is under RUB 60 million:
- The transactions are not controlled transactions, and there is no need to submit a report on such transactions;
- The prices applied under such transactions are checked by local tax authorities;
- Having transfer pricing documentation does automatically exempt from penalty in this case.
Verifications will be more likely as local tax authorities have more resources for inspections, so companies should prepare for inspections by drawing up transfer pricing documentation. And since the availability of documentation does not release from penalty, the quality of the justifications provided in the documentation is of the utmost importance.
Groups at higher risk of transfer pricing verifications
Companies will fall under scrutiny if tax authorities notice signs of price manipulation to decrease taxes. Regardless of the amounts of transactions with related parties, transfer pricing risks are greater for the following companies:
- Companies with low profitability or loss for which transfer prices constitute a significant part of revenues or expenses (e.g. trading companies mainly importing goods bought from foreign related parties);
- Companies not paying out dividends;
- Companies paying substantial royalties or management fees, etc.
If you have questions about the documentation preparation, please contact us. We will be happy to help.