The new law, which is the first major update in 10 years, includes a number of changes that will see the country’s transfer pricing rules become more aligned with OECD standards.
The passing of the document to the government is seen as the first real step in reforming the law, which has faltered since change was mooted five years ago.
The new law was drafted by the ministries of finance and economic development. Once the government has approved the new law, it will be passed to Parliament where it must go through three readings before being enacted. The first reading is expected to take place during November or December.
The draft legislation could go through two readings during the spring session of Parliament.
If the process goes to plan, then the law could become effective from July 1 2010, but if there are delays in the process an effective date of January 1 2011 is possible.
The new law contains a number of changes including the broadening of the criteria for the determination of interdependency, the extension of controllable transactions to include transactions involving property rights, information and intellectual property as well as limiting controllable transactions to related-party transactions and certain types of third-party cross-border transactions.
Also included in the law is the provision for multilateral advance pricing arrangements (APAs). These will only be available for large taxpayers as determined by the tax authorities. This decision has been criticised by one tax professional.
““APAs are now available for the largest taxpayers, but this provision is discriminatory," said Svetlana Stroykova, a director in the transfer pricing group of PricewaterhouseCoopers in Russia. "However, I do not exclude that this issue may be raised during the hearings of the draft law in the Parliament and thus, there may be suggestions to change it. I would say that when a new law is implemented, practical application may show that there are some areas that require further clarification.”
The inclusion of APAs has also been criticised because the tax authorities have no understanding of the process.
“We need to have a more developed market for the authorities to say that the price is market-based. APAs will require a lot of time and effort to implement,” said Ruslan Vasutin, a tax partner at DLA Piper in Russia.
The tax market does not expect APAs to be effective in Russia until a year after the new law is introduced. This year will be used to train officials in APAs and ensure market prices are established.
The recognition of market prices will result in the abolition of the country’s 20% safe harbour rules. And if a Russian group of companies chooses to consolidate its accounts, then its intra-group transactions will not be subject to transfer pricing control and so no documentation will be required.
There will also be three new methods for calculating a transfer price. The secondary product method, the transactional net margin method and the profit split method have been added to create a list of six methods.