SC decision places emphasis on intra-group transfer prices.

30.05.2011

Supporting intra-group transfer prices may become a "must" even under the current Russian transfer pricing rules.
 
Supreme Abritrazh Court in its Ruling No ВАС-2087/11 dated 04.03.2011 supported lower level courts in upward adjustment of intra-group prices for iron ore concentrate that a Mechel mining subsidiary (Korshunovsky GOK) supplied to the group’s trading company.

Traditionally, most of the transfer cases has been won by the taxpayers, both due to the allowed 20% “safe-harbor” deviation from market price, and due to the fact that historically the courts placed the burden of proof of the breach of the transfer pricing rules on the tax authorities that had to follow a strict and difficult to comply procedure in the Tax Code.  This historically has been difficult for the tax authorities and they have been losing approximately 75 to 80% of cases.

However, in the above Ruling the Supreme Arbitrazh Court supported the lower courts in their position that the courts should not be bound by the methods listed in the Tax Code and may accept any other method as long the court finds such method justifiable.  The courts also argued that the taxpayer should have provided proof that the method used by the tax authorities provides incorrect results (which according to the court Mechel failed to do).

If this approach is followed by other courts, this may mean that the Russian taxpayers may now need to place a lot more emphasis on justification of their intra-group transfer prices even under the existing transfer pricing legislation.  Therefore, taxpayers are strongly advised to revisit their current approaches to supporting transfer prices within Russia.  In some cases supporting documentation may now become a “must” rather than “nice-to-have”.

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