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Country-by-country Reports of International Groups of Companies: the BEPS Plan in Russian
The Organization for Economic Co-operation and Development, or the OECD approved a global response plan with the Base Erosion and Profit Shifting, or the BEPS in 2013. Steps from eighth to tenth of the Plan include the development of transfer pricing1 rules in terms of intangible assets, transfer of risk and capital, as well as other high-risk transactions. Since then, for five years now, Russia has been actively fighting the Base Erosion and Profit Shifting, trying to translate the principles attached by the OECD to local legislation.
The BEPS plan in relation to the observance of the principles of market prices for transfer transactions for taxation purposes includes a three-step control system that is distributed both locally and internationally.
The Master File includes high-level global information about business processes within international groups of companies and their transfer pricing policies.
The Local File is a detailed report on controlled transactions made by individual resident companies of a particular country, on the prices of transfer transactions, and also contains the results of functional, economic and financial analysis, justifying the applied prices for transactions.
The Country-by-country report is a formal instrument of control over some international groups of companies, which involves submission of special annual reports to the controlling authorities.
At the time of the initial approval of the BEPS plan, Russia already had domestic legislation on controlling pricing for transactions between related parties2, which, however, did not provide for any tools for the international exchange of data on transfer transactions3. In fact, this legislation covered the second level of control which is a local file. Trying to ensure the most effective collection of information, the Ministry of Finance of Russia has issued recommendations on the preparation of transfer documentation4.
Since 2018, new norms have been introduced in Russian tax legislation that shall ensure the implementation of steps eighth to tenth of the BEPS plan in terms of the Master File and Country-by-country reports. For these purposes, the Tax Code has been supplemented with Chapter 14.4-1 Presentation of Documentation for International Groups of Companies.
The law introduced the concept of the international group of companies. In order for a taxpayer to be recognized as a member of such group, it is not enough just to have interdependent counterparties abroad. For this, all conditions of recognition of the group as an international group of companies shall be fulfilled:
- The Group prepares consolidated financial statements in accordance with Russian law or at the request of stock exchanges.
- The group includes at least one organization or structure without forming a legal entity that is recognized as a tax resident of Russia or that operates in Russia through a permanent representative office, and at least one organization or structure without forming a legal entity that is not recognized as a tax resident of Russia or recognized as such, but subject to taxation in respect of business activities through a permanent establishment abroad5.
The Russian legislator has tried to put the basis of the BEPS plan into new norms, therefore, he has kept the idea of dividing the institutions of control into three levels.
Global documentation, as well as the Master File from the original document, shall include information about the international group of companies, describe its business processes and describe the essential facts of economic life. The global documentation describes the underlying principles of distribution of functions, risks and assets in a group of companies and contains the results of a brief functional analysis of intragroup transactions6. This part of the country-by-country report is submitted by the parent company of the group.
Questions directly relating to specific members of the group shall be contained in the national documentation. It analyzes the results of transactions in the context of individual counterparties and concludes that the pricing rules for transactions are in accordance with local legislation. The law expressly provided that this level of documentation corresponds to the documentation that was previously prepared in accordance with Section 105.15 of the Tax Code7.
The Country-by-country report is an additional document to the already familiar to Russian taxpayers notification of controlled transactions8. The Country-by-country report, in contrast to the notification, shall contain information not only about controlled transactions, but also other financial and other relevant information about its activities. The information specified in the Country-by-country report will form the source of automatic information exchange regarding transfer pricing between OECD member countries.
The country-by-country report includes the following information for the reporting period:
- The total amount of taxpayer income, including breakdown to the amount of income from transactions with members of this international group of companies and the amount of income from transactions with other persons, including associated organizations;
- The amount of profit (loss) before taxation for the reporting period;
- The amounts of calculated and paid corporate income tax;
- The amount of capital at the end of the reporting period;
- The amount of accumulated profit at the end of the reporting period;
- Information on the number of employees;
- The value of tangible assets at the date of the end of the reporting period;
- A full range of information about each member of an international group, including the state (territory), in accordance with the law of which such member is established, the state (territory) of tax residency and the main activities of each member of an international group of companies9.
In addition, the Russian legislator has actually divided the country-by-country report into two levels, one of which is mandatory for all organizations, and the second is only for those who do not meet specially established criteria.
The first level is the notification of participation in the international group of companies. It shall be represented by all taxpayers who are members of international groups of companies, except for foreign organizations that receive income from sources in Russia without a permanent representative office10.
The country-by-country report shall, first of all, be filed by taxpayers, about which the parent company did not file the country-by-country report. The second condition that shows the need to submit a country-by-country report is the amount of revenue for a group of companies. The report is submitted if such revenue exceeds 50 billion rubles (for groups parent company of which is located in Russia) or another amount established by the legislation of the incorporation of the parent company11.
The terms and methods of filing documents that the law requires to prepare for the purposes of controlling transfer pricing are given in the table:
The obligation to submit a notice of participation in the international group of companies, of a global documentation and a country-by-country report has already arisen in relation to the 2017 reporting period. For violation of the rules for filing a notice of participation in the international group of companies, a fine has been set at the amount of 50,000 rubles12, a country-by-country report at the amount of another 100,000 rubles13, global documentation also at the amount of 100,000 rubles14. Until 2020, there is a moratorium on attracting taxpayers to these types of tax liability. This means that taxpayers shall not be held accountable for not submitting reports for 2017, 2018 and 201915.
But the responsibility for violation of the deadlines for submission of national documentation has been already in force. Apparently, assuming that taxpayers are already used to preparing transfer documentation, the legislator did not wait, and imposed a penalty for not submitting national documentation (that is, former transfer documentation in accordance with article 105.15 of the Tax Code), in the amount of 100,000 rubles already from 2018, that is, from the report for 201716. And taxpayers who have decided to save on its preparation can only hope that the Federal Tax Service will ignore them.
The feelings of the business community, which can be observed now everywhere, can be described in the words of Chatsky: “I saw it- I did not believe my eyes !”17 Although the only way to submit notice of participation in the international group of companies is electronic, the Federal Tax Service developed the format of this document only by March 2018. The developers of software products for business have not yet provided taxpayers with the opportunity to submit notifications, despite the fact that for most groups the deadline for their submission expired in early September. Nobody seems to remember the country-by-country report. Russian participants of the international groups of companies, even realizing that there are still three years left to join the procedure of exchanging country-by-country information without fines, already feel like violators. It is worth admitting that at present the BEPS plan in terms of transfer pricing can be considered implemented in Russian law only on paper.
- Transfer pricing is the pricing of transactions between related parties, which, for various reasons, have an impact on each other’s business results.
- Section V.I of the Tax Code of the Russian Federation.
- Article 105.15 of the Tax Code of the Russian Federation.
- Recommendations on the preparation of transfer documentation were formulated in Letter of the Federal Tax Service of Russia of August 30, 2012 No. OA-4-13 / 14433 @ On Preparation and Submission of Documentation for Tax Control Purposes.
- Clause 1 of Article 105.16-1 of the Tax Code of the Russian Federation.
- Article 105.16-4 of the Tax Code of the Russian Federation.
- Article 105.16-5 of the Tax Code of the Russian Federation.
- The notification is completed and submitted by taxpayers who have made controlled transactions until May 20 of the year following the reporting year, in accordance with Article 105.16 of the Tax Code of the Russian Federation.
- Clause 1 of Article 105.16-6 of the Tax Code of the Russian Federation.
- Article 105.16-2 of the Tax Code of the Russian Federation.
- Clause 6 of Article 105.16-3 of the Tax Code of the Russian Federation.
- Article 129.9 of the Tax Code of the Russian Federation.
- Article 129.10 of the Tax Code of the Russian Federation.
- Clause 2 of Article 129.11 of the Tax Code of the Russian Federation.
- Clause 7 of Article 2 of the Federal Law of 27.11.2017 No. 340-FZ On Amendments to Part One of the Tax Code of the Russian Federation in Connection with Implementation of the International Automatic Exchange of Information and Documentation on International Groups of Companies.
- Clause 1 of Article 129.11 of the Tax Code of the Russian Federation.
- A.S. Griboedov, Woe from Wit.
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