Court practices regarding the application of TP rules in Russia is evolving. In the recent PJSC Togliattiazot case, the court initially supported the tax authorities’ position with respect to additional tax charges of an approximate amount of RUB 40 million. This is the third high-profile TP case (after similar cases involving PJSC Uralkali and NK Dulisma).
The subject of the dispute in this case was the supply of chemicals from PJSC “Togliattiazot” (RusCo) to the company NITROCHEM DISTRIBUTION AG (SwitzCo) in 2012 for a value of more than RUB 1 billion.
The dispute focused on two issues:
- Recognition of the transaction as controlled due to the level of interdependency between parties in the transaction
- Application of a specific TP method for determining market prices in the transaction
Recognition of the transaction as controlled due to the level of interdependency between parties in the transaction
Pursuant to the Russian Tax Code, cross-border transactions are recognized as controlled if the counterparties in the transaction are interdependent (if there is a direct or indirect capital participation between them of at least 25%).
Despite, according to official data, the level of participation between RusCo and SwitzCo being less than 25%, the Russian tax authorities have managed to establish interdependency of the parties in the transaction through “a complex scheme of nominal ownership, trust management and custody of shares”.
The court initially supported the tax authorities and established interdependency of RusCo and SwitzCo on the basis of paragraph 7 of Art. 105.1 of the Russian Tax Code (“on other grounds”).
Application of a specific TP method for determining market prices in the transaction
In order to confirm the market level of prices in the transaction, PJSC “Togliattiazot” submitted TP documentation on the analyzed export transactions to the Russian tax authorities. The TP documentation was prepared using the transactional net margin method (TNMM).
The approach of PJSC “Tolyattiazot” to calculating the market range was challenged by the Russian tax authorities for the following reasons:
- As far as it is possible to use the CUP method in this case, the use of other methods (including TMNN) are not correct from a Russian tax legislation perspective.
- The results of the benchmark analysis (list of comparable companies) do not meet the criteria for comparable companies stated in the Russian Tax Code
The court supported the tax authorities’ approach regarding the need to apply the CUP method (the comparable market price method) to this transaction, and agreed with the tax authorities on the results of the analysis carried out under the TNMM method.
Why is it important?
- The Russian Tax authorities may recognize the interdependency of companies “on other grounds”, even if the counterparties do not meet the criteria for interdependency specified in the Russian Tax Code;
- The Russian tax authorities continue to insist on the use of the CUP method to determine the market range of prices in controlled transactions (if applicable);
- The Russian tax authorities pay special attention to the quality of information and calculations provided by taxpayers in TP Documentation.