International trends

1. Transfer pricing in Russia and international trends20 June 2013Steven Cawdron, Ernst & Young Moscow

2. International trends

3. Changes in TP today – tax enforcement and controversy Ernst & Young’s 2012 Tax Risk & Controversy survey • Dramatic effect of globalization • Tax administrators have become more aggressive and focused • High pace of legislative change • Growing disclosure and transparency requirements • Expansion into emerging markets brings uncertainty • A new breed of tax activism has emerged

4. 2012 Ernst & Young Global Transfer Pricing Tax Authority Survey • The 2012 Transfer Pricing Tax Authority Survey covers 50 tax authorities across the Americas, Asia Pacific, Europe, the Middle East and Africa • Key survey results • Increase in tax authority staffing • Resilience of the arm’s length standard • Expanding geographic scope of transfer pricing legislation • Specific industries and countries under scrutiny • Increase in the imposition of penalties • Increase advance pricing agreement availability

5. OECD and United Nations influences and factors • New OECD proposals • Simplication of tax/transfer pricing administration • Safe harbors • Intangibles • BEPS • UN engagement with emerging markets • Lack of comparables • Seen as a practical manual for the preparation of TP documentation in developing countries • Being used to drive the political agenda by the BRICS (in particular, Brazil, India and China).

6. Audit topics, triggers and managing audits • More exchange of information activity between governments and international matching of transactions to see if TP is correct • TP documentation comparables becoming the weak link • Intangibles, intangibles, intangibles • Higher-profile disputes • Reputational, financial, and even personal risk • Penalty exposure • Expectation for taxpayers to comply with both the spirit and the letter of the law

7. Russian Transfer Pricing

8. New Russian Transfer Pricing Rules • New rules became effective from 1 January 2012 • Transition rules 2012-2013 • Primary focus is on related parties transactions • Although domestic transactions are also subject to control if certain thresholds are reached • It has introduced: • the arm’s length principle, i.e. substance over form • new Transfer Pricing methods, akin to the OECD • TP reporting / documentation requirements • TP audits & penalties • APA’s

9. Developments in 2012 and 2013 • Taxpayers have sought guidance from the ministry of finance on a number of issues, including: • Grouping of transaction, calculation of the threshold for control, application of the rules to financing transactions, application of penalties, preparation of documentation, data permitted for us as comparables, etc • The Tax authority is directing resource at certain industry sectors • Increasing exchange of information, and experience, between the Russian Tax Authority and Foreign counterparties • First APA’s concluded, albeit with state companies and only on transactions priced with CUP

10. Significant issues still exist • The introduction of TP rules has helped the Russian tax system move closer to international standards • However, significant practical issues still exist • More needs to be done to address: • Year-end pricing adjustments • Intellectual property charges • Service charges and models • Compliance burden • Interaction with other taxes – customs & indirect

11. Thank you!