Goltsblat BLP Tax Practice advises on the outcome of the challenge to the format for notifying of controlled transactions (Avtoframos et al. vs the Federal Tax Service of Russia
Publication of Resolution of the Presidium of the Supreme Commercial Court of the Russian Federation No. 18588/13 dated 25 February 2014 on the Avtoframos et al. vs the Federal Tax Service of Russia case (the “Resolution”) is an important step taken to protect the business community against the need to provide any information at the discretion of the Federal Tax Service of Russia at the stage when submission of transfer pricing notifications (the “Notification”) and, consequently, to bear the relevant costs.
The dispute concerned two main legal issues: 1) whether the list of information to be disclosed in the Notification under clause 3, article 105.16 of the Tax Code of the Russian Federation (the “List”) is exhaustive; and 2) whether the information required by the Federal Tax Service of Russia at the Notifications complies with the List.
On the first issue, the Presidium stated that data included in the Notification should comply with clause 3, article 105.16 of the Russian Tax Code (and that the court of the first instance failed to examine this issue specifically), thereby recognising the List as exhaustive and binding on the Federal Tax Service of Russia. This also places restrictions on the tax administration should it introduce any further amendments to the format of the Notification.
These restrictions seem to be the litigation outcome of paramount importance, as such a position will apply in any other cases when the Federal Tax Service of Russia (or the Ministry of Finance) is responsible for approving any formats on the basis of information lists stipulated by the legislation. It appears that another case of this type will follow shortly: a very similar mechanism is implanted in a draft law introducing amendments with respect to controlled foreign companies, in which the formats for notifying of participation in (any) foreign companies and controlled foreign companies are going to be approved. An insatiable appetite may be demonstrated once again…
The second issue (regarding compliance of certain items of the Notification with the List) is still under discussion and will be examined by the court of the first instance during the new consideration. Yet the Presidium imposes tight restrictions in this respect as well: the format of the Notification may not include information that the law prescribes to be obtained under a tax audit with respect to pricing. The court is quite categorical: collection of information may not replace an audit by means of the Notifications.
With regard to the most problematic issue (from the perspective of the number of notification 1Б sheets) -- the transaction subject matter, the court accepted that the format may include clarification columns but restricted them solely to material conditions covering performance under a transaction and/or affecting the pricing. The price per unit of measurement does not explicitly relate to either of these, as it is the result of analysis but not the characteristic constituting the basis for determining the price.
Presently, one of the main issues is further consideration of this case on the merits. When the case is re-considered, each of the three claimants will have to decide whether or not to challenge the notification format. It is also important to note that, during a new consideration of the case, the court will have the right to accept the refusal of the initial claimants and, in the absence of new claimants, to discontinue the proceedings (the Presidium has deduced from the law a prohibition on accepting refusal and termination of litigation challenging legislative regulations only with respect to itself).
Thus, the future of this litigation and, consequently, the amount of information to be specified in annual notifications of controlled transactions currently depend on the initiative of the business community (whether the existing claimants support their claims and whether new claimants participate in the proceedings).
Further actions planned by the party that initiated these legal proceedings – Goltsblat BLP Tax Practice:
If the business community takes the initiative, we well be glad to provide all requisite legal support on this case of principle and continue to fight against the contested order of the Federal Tax Service of Russia. If no initiative is taken, we do not plan to proceed on our own either, as we initiated these court proceedings to protect the interests of the business community and will further participate in it only if the business community is ready to continue this fight.
* The case was handled by Evgeny Timofeev, Partner, Head of Russian/CIS Tax Practice, Goltsblat BLP and Alexander Erasov, Senior Associate, Tax Practice, Goltsblat BLP.
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