On 8 June 2015 the President of the Russian Federation signed Federal Law No. 150-FZ, which introduced, inter alia, amendments to the Tax Code of the Russian Federation (hereinafter the RF Tax Code) regarding corresponding adjustments. These amendments are particularly relevant given the anticipated increase in the number of companies that will be included in the Russian tax authorities’ transfer pricing audit plan for 2013-2014.

 

Clarifying corresponding adjustments, made based on the decisions of the tax authorities

 

The transfer pricing rules covering price controls for tax purposes, which entered into force from 1 January 2012, stipulated that corresponding adjustments might be made to internal Russian controlled transactions if their respective prices were adjusted by the tax authorities as a result of a transfer pricing audit on the basis of article 105.17 of the RF Tax Code. These adjustments were introduced in order to prevent double taxation within Russia. For example, if the results of one of these audits lead to the prices in a taxpayer’s controlled transaction being adjusted and to an increase in the taxpayer’s tax base, then its counterparty in this transaction is entitled to reduce its own tax base by the same amount.

The new version of article 105.18 of the RF Tax Code sets out in more detail the procedure for performing corresponding adjustments based on the tax authorities’ decisions.

The amendments have been introduced in order to clarify this procedure both for taxpayers and for the tax authorities:

• When can the adjustment be performed? From the moment when the taxpayer – the other party in the transaction – receives a notice from the Federal Tax Service of Russia. Furthermore, the amendments establish that the adjustment should be performed in the tax return for the tax period when the notice was received.

• What documents are required? Only the notice received from the Federal Tax Service of Russia is required. This notice should be sent to the taxpayer’s address within one month of the date when its counterparty implemented the decision of the tax authorities (by registered mail or by e-mail). This timeframe is suspended from the moment when an appeal is filed in a court against the decision of the tax authority demanding adjustment to the counterparty’s prices in a transaction, until a corresponding court order enters into force.

  At the same time, taxpayers have been granted the right to file a request to receive notices from the Federal Tax Service of Russia, allowing taxpayers to perform corresponding adjustments. The request can be submitted if the aforementioned timeframe (1 month) has not been observed (documents confirming the issued decision in respect of the taxpayer’s counterparty should be attached to the request). Furthermore, the amendments introduce penalties for the tax authorities if they are late in submitting this notice to the taxpayer (using the applicable refinancing rate of the RF Central Bank to the amount of tax to be offset/returned).

• In what instances can they refuse to issue a notice?The RF Tax Code stipulates the following grounds: (1) The taxpayer has not complied with the application procedures for receiving a notice; (2) The information in the application is not confirmed by supporting documentation; (3) the counterparty submitted an updated tax return which included changes in the tax base and the amounts of tax to be paid (or tax losses).

• In what circumstances can the tax authorities demand that the taxpayer perform a reverse adjustment? If the decision of the tax authorities regarding the taxpayer’s counterparty is quashed by judicial means. Reverse adjustments are performed in compliance with the notice issued by the tax authority. Late payment interest is not accrued regarding these reverse adjustment amounts.

 

Voluntary corresponding adjustments

 

In accordance with the new provisions of article 105.18 of the RF Tax Code, taxpayers may now apply corresponding adjustments not only based on the results of the transfer pricing audit of their counterparty by the tax authorities, but also if their counterparty independently adjusted the tax base in its tax return, provided that the counterparty repaid the amount of the arrears that had arisen as a result of making such an adjustment (where applicable).

Legislator stipulates the following procedure for performing adjustments:

 

• When can they be performed? To perform a corresponding adjustment, documents are required from the counterparty which confirm the adjustment and that the counterparty has fulfilled all of its obligations to the state budget. The adjustment is performed in the tax return for the tax period when the counterparty reported this adjustment.

• What documents are required? To substantiate the adjustment, it will be necessary to submit documents confirming that the counterparty adjusted the tax base and the tax amounts (losses), provide clarifications on the transaction in respect of which the adjustment was performed, and also confirm that the counterparty executed the tax payment obligation that arose as a result of the adjustment.

  The documents should be received directly from the counterparty. The Federal Tax Service of Russia does not submit its own corresponding data.

  Please note that the RF Tax Code does not provide a clear-cut list of the documents that are needed, which potentially might lead to disputes with other regional tax authorities regarding this issue.

• In what case might it be necessary to perform a reverse adjustment?It is obligatory if the counterparty files an updated tax return which reduces the tax base. A reverse adjustment is performed in accordance with the notice received from the tax authority. Furthermore, late payment interest is accrued by the company in the event that it emerges that the company has arrears (in this case it is presumed that the company has unjustifiably exercised its right to perform the corresponding adjustment).

• Potential issues to consider:

  • first and foremost, as previously, the corresponding adjustments should be performed at the location of the taxpayer. Difficulties may arise from an administrative perspective regarding gaining approval for the corresponding adjustments with the local tax authorities;

  • furthermore, the list of documents required to perform voluntary corresponding adjustments is not clearly determined, whereas the RF Tax Code stipulates that in the absence of the required documents, tax amounts may be restored, including the imposition of all late payment interest and fines;

  • there are also issues regarding mandatory reverse adjustments – the respective calculations are performed directly by the tax authorities, and not by taxpayers, meaning that potentially there could be strongly different views regarding these adjustments.

The adopted law only applies to transactions in respect of which income or expenses have been recognised in accordance with Chapter 25 of the RF Tax Code from 1 January 2015, regardless of the date on which the corresponding contract was concluded. It would thus not appear to be possible to apply these provisions on voluntary corresponding adjustments to earlier periods.

We would like to draw your attention to the following issues that remain unresolved in the new versions of article 105.3 and article 105.18 in the RF Tax Code:

• it is only possible to reduce the tax base by adjusting the applied prices in instances when the other company – a Russian taxpayer – increased the tax base by the same amount. As a general rule, taxpayers may not adjust prices unilaterally if this results in an understatement of their tax liabilities. Accordingly, the mechanism for making adjustments to reduce the tax base unfortunately remains inaccessible when concerning transactions with foreign counterparties. This is particularly relevant for the Russian subsidiaries of foreign corporations;*

*In addition, the new provisions clarify that the taxpayer has no such right if the adjustment to the prices results in an increase in the taxpayer’s losses.

• the mechanism for corresponding adjustments is only available for taxpayers which are Russian organisations. Branches of foreign companies may not benefit from the corresponding adjustments;

• the mechanism for voluntary corresponding adjustments assumes that the parties in a controlled transaction have exchanged information on the price adjustments being performed. However, this is not always the case in practice (for example, in instances where one company does not have a controlling shareholding of more than 50% in the other company). The Federal Tax Service of Russia is only obliged to provide notices for corresponding adjustments based on the results of transfer pricing audits, but not for voluntary corresponding adjustments.

 

Please contact us if you have any questions. We would be delighted to discuss them with you.