Gazprom Neft proposes amendments to draft Federal Law on Transfer Pricing

Gazprom Neft has proposed amendments to the draft Federal Law on Transfer Pricing. The company believes that, in addition to “antitrust red tape”, the bill, if passed in its current form, may become a new tool of administrative pressure on Russian business - in this case, on the part of RF FTS [Federal Tax Service]. This is due to the fact that the aims and objectives of FTS and FAS [Federal Anti-Monopoly Service] are diametrically opposed. As Kurban Nepesov, head of Gazprom Neft’s Financial and Administrative Law Division, said on 1 July at a session of the RF CCI Committee for Energy Strategy and Fuel and Energy Sector Development, “the higher the price, the worse for FAS, while for FTS the higher the price, the better, because it increases the tax base used for tax assessment”.

Gazprom Neft’s representative said that if all judiciary authorities, including the RF Constitutional Court, came out in support of the position of FAS, then transfer pricing could essentially disappear as a mechanism at major companies, at least as interpreted by FAS, because a clause in FAS's directives to this effect provides for a total ban on transfer pricing. “Meanwhile, it is a matter of common knowledge the world over that transfer prices per se are not inconsistent with statutory provisions if used as a financial management tool rather than as a tax evasion scheme. This tool can be used quite reasonably in forming investment centres for subsequent capital expenditures and portfolio investment, as a source of funding for the acquisition of assets, etc.," said K.Nepesov. "This mechanism is acceptable the world over; what is more, legislation in a number of countries has expressly provided for such an option.”

The points made by Gazprom Neft’s experts are predicated on a number of assumptions. First, the absence of a guarantee that the commodity price “laid down” by FAS for a company will be accepted by a tax authority supervising another company that trades in the same commodity.

Second, given that the concept of a “monopolistic high price” is not adequately defined in current legislation, the validity of the price set by FAS also gives cause for doubt. “Why should the tax authorities be caught in a bind of FAS's making, especially when it revolves around a vague “notion” such as a monopolistic high price and other FAS grievances," said K.Nepesov. "Especially as courts may quash FAS's directives, ruling that the price “laid down” by FAS is unwarranted. What do we do then?”

Third, as regards affiliation as grounds for a tax audit of the transaction price, Gazprom Neft has proposed changing the current criterion of a 20% stake in a company to a 50% minimum interest, since the latter provides stronger control and can actually attest to the fact that a person “affects the terms or results of transactions made by another person”.

Fourth, Gazprom Neft’s representative emphasized that the new rules should only be applied to import/export transactions, and, should the law prove a success in practice, it would be possible to look into applying the statute to domestic transactions as well.

Gazprom Neft’s representative also highlighted the need to use only relevant sources of information for the purposes of tax assessment. This will make it possible to avoid practical situations where a tax authority will use information sources that are either unknown to the taxpayer (for example, those obtained when auditing other entities) or biased - solely in order to contest the taxpayer's price and assess additional liabilities. The round table attendees also agreed with a point made by the Gazprom Neft expert that there was no need to introduce a new form of tax control - special monitoring of transaction prices - or to introduce a new regulation on liability for breach of the transfer pricing statute, because the RF Tax Code statutes already in place make such innovations superfluous.

In concluding his address, K.Nepesov summed up as follows: “I hope that when the draft law on transfer pricing is being read, the opinions of all stakeholders will be heard and taken on board, and it will not become yet another “nightmare” for businessmen, generating new risks in an environment with uncertain “rules of the game”, as was the case with the 2nd and 3rd antitrust packages.”