Corporate agreement between owners: opportunities and limitations
We give an introduction
Imagine that a Russian company that produces several types of products has a foreign founder who works abroad in the same industry and is engaged in the production of similar types of products. The parent company plans to order services from its Russian subsidiary to promote and advertise new products on the Russian market. The planned scope of services is as follows:
advertising in all types of media;
marketing activity aimed at contact with the client (for example, sending by e-mail);
measures to promote new products based on marketing and price analysis.
We add that the Russian subsidiary conducts several types of activities, including the production and wholesale of its products.
The accountant of this company needs to offer the CFO of the foreign parent company a pricing methodology for the transaction, in accordance with the OECD international transfer pricing guidelines and standards sec. V.1 of the Tax Code of the Russian Federation and minimizing the risk of tax assessments for group companies. Moreover, it is necessary not only to describe the methodology, but also to give specific accounts indicating the payment for services to promote new products of a foreign investor. Also, the accountant of the Russian subsidiary needs to consider the consequences of concluding a transaction with the parent in terms of indirect taxation.
About transfer pricing in a group of companies
The Tax Code does not use the concept of “transfer price”. This is partly due to the fact that such prices are applied in international cooperation, and the code regulates tax relations in a separate jurisdiction. Transfer pricing involves the sale of goods or services by interdependent parties at intercompany prices different from market prices. The manipulation of transfer prices makes it possible to redistribute the total profit of a group of interdependent persons in favor of those who are in lower tax states. This is one of the common schemes of international tax planning in order to minimize paid taxes. For good reason, transfer prices are subject to control by fiscal authorities of various states, and the Russian Federation is no exception.
Part I of the Tax Code of the Russian Federation is introduced in Sec. V.1, which is largely consistent with the OECD Transfer Pricing Guidelines. In addition, there is the UN Practical Transfer Pricing Manual for Developing Countries, which provides detailed information on transfer pricing. The experience of applying the rules of such pricing in different countries of the world is described. This document is useful for both regulatory authorities and practitioners. In particular, methods for determining prices for taxation are described with practical examples, and criteria are established by which tax authorities determine suspicious transactions. And in Sec. V.1 of the Tax Code of the Russian Federation gives general instructions that, for national jurisdiction, take precedence over these international documents.
Back to our deal. It involves companies of the group for whose activities consolidated financial statements are prepared, which assumes the accounting of all financial indicators in aggregate (see IFRS 10 “Consolidated Financial Statements”). Intra-group settlements and transactions are mutually excluded when reporting the group. Maximum profit is achieved through revenues from external sources. Intra-group operations as such do not bring profit to the group, on the contrary, they can cause losses due to the collection of taxes from intra-group operations, and the group has an additional outflow of funds to external consumers (budget). As a result, the pricing methodology between the group enterprises should minimize the transaction price used to calculate taxes and other fees (for example, customs duties).
As a result, it is in the interests of the group to minimize profits for tax purposes on transactions between the parent company and the subsidiary. These transactions fall under tax control as transactions with transfer pricing, that is, with pricing by related parties. In Russian jurisdiction, under Sec. V.1 of the Tax Code. It is according to these rules that tax specialists will check how legitimate minimization is.
A few words about controlled transactions
Before determining prices, you need to figure out whether the transaction is controllable. Moreover, the said article sets the minimum indicators for the amount of income from transactions. They are quite substantial and are estimated in millions and billions.
It is believed that any transactions with foreign related parties (regardless of the turnover of such transactions) fall into the category of controlled.