Project Group №2

Corporate law and governance, financial transaction taxes

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Comment by Project Group 2 (Corporate law and governance, financial transaction taxes)

20.10.2011 / MIFC

The Transfer Pricing Control Act is one of the crucial recently adopted laws. Currently the Ministry of Finance is preparing a number of technical amendments to the Act. Our Project Group is closely following the process. Our working agenda includes transfer pricing issues in the financial sector, for instance, using transfer pricing rules in rates and listed securities market value calculation.

Our Group has also prepared amendments to the Tax Code on redistribution of income and costs for multinational companies. The project has been forwarded to Deputy Minister of Finance S. Shatalov. We are now discussing the amendments with the Federal Tax Service and the Ministry of Finance.

Today, Russian tax authorities may refuse to accept income and costs as transferred by foreign financial companies to their Russian subsidiaries per Organization for Economic Co-operation and Development (OECD) rules. Similar problems occur when Russian companies wish to transfer part of their income/costs to subsidiaries abroad.

Transferring part of the costs and the financial gain within a multinational is common global practice, codified by OECD and upheld by the group policy of each multinational. The impossibility of legal redistribution of income and costs to Russian subsidiaries lowers Russia’s competitive edge in the process of branch location. Also, the funds remain on foreign head offices’ books, causing loss of profit for the Russian budget from taxation of local transactions of the multinational.

We propose amending the Russian Tax Code with new clauses allowing transfer of costs and financial gain to the Russian branches of multinationals. The transfer of costs will be based on documenting and justification rules. The income will be transferred according rules set for the application of VAT to profit transferred to Russian entities, while eliminating the risk of creating a permanent representative office in Russia for the Group’s foreign companies in the process of transferring a justified share of profit to Russian branches.

The proposed amendments are based on the global practice of income and cost redistribution, applied in OECD countries. Our project focuses in trans-border distribution of cost and profit within an international group of related companies. Our opinion is that in the near future similar procedures within Russian groups may be structured on the basis of the Consolidated Taxpayer Act.

Project Group №2