Controlled transactions, or the Interdependency Quest

Advocate Maxim Rovinskiy, head of tax and customs law practice of the Law Firm "YUST"

Tatiana Barteneva, “EZh”

A new section will be introduced to the Tax Code in 2012, composed of six Chapters split into 25 Articles. The section will be dedicated to the interdependent persons, controlled transactions, prices applied in them and tax control over all this. This article is aimed at helping the accountants to understand the intertwining of the new rules of control over the interdependent persons in order to avoid the wrath of tax authorities.

The Section V.1 of the TCRF is not just an expansion of Articles 20 and 40 of the TCRF, which governed the procedure of defining the interdependence and the issues of market prices control before 2012. This is a completely new legal product designed to settle the relationships connected with the transfer pricing. What is transfer pricing? The Tax Code does not say. It is an internal economic instrument of the companies. It is essentially the following: interdependent companies sell to each other goods (works, services) at the prices different from the market prices.

One should note that the section is rather complicated. Here we have to deal with a number of problems of legal text construction, including:

• Setting completely new approaches, which significantly change the very institute of taxation of transfer pricing transactions (for example, introducing the new category of controlled transactions, new tax checks, special elements of tax offences etc.);
• Use of new terms, and some of those are not defined at the first mention but in the subsequent articles, which complicates comprehension (the lawmaker has done this, for example, to the definition of controlled transactions);
• Application of complicated formulas, the wording of which allows for different construction (in particular, the procedure of definition of the person’s share of the organization);
• Appearance of many appraisal groups;
• Plenty of reference rules.

All this, together with numerous tax amendments, turns studying the new section of the Tax Code into something like a computer quest with many riddles, red herrings and even logical dead ends.

Full version of the publication is available here.