How to determine securities prices for profit and income tax purposes from 2011.

10.02.2011

Legal Update No. 220.

Goltsblat BLP advises that orders of the Federal Service for the Financial Markets of 9 November 2010 No. 10-65/пз-н, No. 10-66/пз-н and No. 10-67/пз-н have established a new Procedure for determining the accounting and market prices (including fluctuation limits) of securities and term transaction financial instruments for profit tax and income tax purposes from 1 January 2011.

1. The Procedure for calculating the accounting price of securities not trading on the organised market for these purposes is as follows:

Provided the tax accounting policy establishes the criteria for choosing one of the methods envisaged by the Procedure, the price may be calculated proceeding from:

  • the price of the security on the securities market (on the basis of the bid quotes offered by professional market participants or posted in the information systems, as well as the composite bid price / average closing price according to the Thomson Reuters and Bloomberg information agencies, respectively);
  • the formulae set out by the given Procedure, considering the type of security and an estimate of the market situation (for bonds and bills) and linked to the net asset value (for shares) or the estimated compensation in connection with share redemption (for investment shares);
  • the price determined by an appraiser.

Note that, according to the new Procedure, the accounting price of securities not trading on the securities market may, for profit tax purposes, only be determined on the basis of the average weighted quotation bid price  for the securities if the quotes are declared by at least three persons.

2. The Procedure for determining the market and accounting prices of securities and the maximum market price fluctuations for personal income tax purposes is as follows:

  • For securities trading on the securities market, the market price is determined on the basis of the average weighted price on the Russian stock exchange, calculated for the time interval dependent on the quantity and volume of transactions made on the exchange, or as the closing price on a foreign stock exchange (unless the Russian tax Code determines how to establish the market price, as it does for investment shares);
  • For securities not trading on the securities market, the accounting price is determined in the same way as for profit tax purposes (see above).
  • The maximum fluctuations of the determined prices are set in the same way as established by the current rules for profit tax purposes. Market prices may rise no higher than the maximum price of a transaction concluded in the organiser’s trades on the securities market, including a foreign exchange, and drop no lower than the minimum price and, for accounting prices, a corridor of 20% is set round the accounting price.

3. The Procedure for determining the accounting price of term transaction financial instruments not trading on the organised market for corporate profit tax purposes is as follows:

Provided the tax accounting policy establishes the criteria for choosing one of the methods envisaged by the Procedure, the price may be calculated proceeding from:

  • the market price of the given term transaction financial instrument (on the basis of the average arithmetic sales price declared by professional market participants, the average weighted price / closing price on a Russian or foreign stock exchange, respectively, and the closing price according to the Thomson Reuters and Bloomberg information agencies);
  • the price calculation formulae established by the Procedure for different types and conditions of term transaction financial instruments and their underlying assets (including forward, swop and option contracts);
  • the value determined by an appraiser;
  • other methods set by the taxpayer in its accounting policy if the conditions of the term transaction financial instruments preclude determining their accounting price according to the Procedure.

The given Procedure also establishes specifics of using a foreign currency/rouble exchange rate  and calculating the accounting prices of securities not trading on the securities market if this is necessary in order to determine the accounting price of the financial instrument.

According to the Russian Tax Code, this Procedure is also applied for calculating personal income tax.

It should be noted that the Procedures mentioned in items 1 and 3 above do not determine the priority method if the taxpayer’s accounting policy does not establish method application criteria.  If, however, the conditions for using a specific calculation method are envisaged by the accounting policy, the tax authority may not dispute the price calculation for securities or financial instruments, even if another calculation method, envisaged by the Procedure, would produce a substantial price difference. 

Goltsblat BLP also advises of the publication of letter of the Ministry of Finance of the Russian Federation of 27 January 2011 No. 03-03-06/2/18 on determining the price interval for organisers of trades on the securities market for the purpose of calculating corporate profit tax by transaction.

According to clause 5, article 280 of the Russian Tax Code, the market price of securities trading on the organised securities market is recognised as the actual price at which they are sold or otherwise withdrawn if this price falls between the maximum and minimum prices (the price interval) of transactions with the given securities, as registered by organisers of trading on the securities market on the day the given transaction is concluded.

Previously, the Russian Ministry of Finance held that no price interval could be calculated for securities if only one transaction with them were registered, since the minimum and maximum prices would be the same, and insisted that, in this case, the results of recent trades involving at least two transactions with the given securities should be taken into consideration (see letter of the Ministry of Finance of the Russian Federation of 19 January 2007 No. 03-03-06/2/6).

The Presidium of the SAC of the Russian Federation concluded, however, in its resolution of  9 March 2010 No. 14965/09, that a single exchange transaction registered on the day the taxpayer concludes a transaction is sufficient to conclude whether or not the actual securities sales price diverges from the market price.

Judging from the Ministry of Finance letter under review, the Ministry accepted the position taken by the SAC, which greatly reduces the likelihood of disputes with tax authorities over the taxpayer taking this same stand.


For additional information, please contact:

Andrey Shpak,
Partner,Tax consulting/ tax litigation, Goltsblat BLP,
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Contact details

For all issues related to publications, news and press releases, please contact:

Ksenia Soboleva

Head of PR and Communications

Subscription

If you would like to receive our legal alerts and updates highlighting current legal issues relevant to your areas of interest and providing expert commentary by our lawyers, please click on "Sign Up" and fill out the form.