Overview of the transfer pricing (TP) rules in Tajikistan
23 March 2023
Tax Messenger
Tax Messenger
On 1 January 2022 the new Tax Code of the Republic of Tajikistan entered into force, which includes transfer pricing (TP) requirements.
The provisions of Chapter 33 "Transfer Pricing" of the Tajik Tax Code ("the TP rules") took effect from 1 January 2023 and introduce the principle of the "conclusion of an agreement on market terms", which must be applied in accordance with the international TP standards for multinational enterprises and tax administrations[1].
Presented below is an overview of the key provisions of the TP rules, which are broadly in line with the main international principles laid down in the OECD Guidelines.
Please note that our comments are based exclusively on our interpretation of the provisions of the TP rules, information available to us immediately after the entry into force of the Law and our experience and knowledge of international TP principles.
The provisions of Chapter 33 "Transfer Pricing" of the Tajik Tax Code ("the TP rules") took effect from 1 January 2023 and introduce the principle of the "conclusion of an agreement on market terms", which must be applied in accordance with the international TP standards for multinational enterprises and tax administrations[1].
Presented below is an overview of the key provisions of the TP rules, which are broadly in line with the main international principles laid down in the OECD Guidelines.
Please note that our comments are based exclusively on our interpretation of the provisions of the TP rules, information available to us immediately after the entry into force of the Law and our experience and knowledge of international TP principles.
General provisions
The principle of the "conclusion of an agreement on market terms" applies, inter alia, where income, expenses, profits or losses arising under a TP agreement between related persons differ from income, expenses, profits or losses of unrelated persons arising under genuine market conditions.
Differences in income, expenses, profits or losses between related and unrelated persons are determined by means of case comparison[1].
According to the Tajik Tax Code, priority is given to the TP rules if the TP rules differ from the OECD Guidelines.
Related persons
The TP rules lay down 7 formal criteria based on which companies and individuals may be considered as two related parties to a transaction.
The main criterion is ownership interest, where one of the parties directly or indirectly owns at least 25% of the capital or voting rights of the other party. However, there are particular cases in which parties are deemed related where:
The parties to a transaction may be deemed related if one of them is a resident of a low-tax country unless the taxpayers are able to prove that they are not related.
The principle of the "conclusion of an agreement on market terms" applies, inter alia, where income, expenses, profits or losses arising under a TP agreement between related persons differ from income, expenses, profits or losses of unrelated persons arising under genuine market conditions.
Differences in income, expenses, profits or losses between related and unrelated persons are determined by means of case comparison[1].
According to the Tajik Tax Code, priority is given to the TP rules if the TP rules differ from the OECD Guidelines.
Related persons
The TP rules lay down 7 formal criteria based on which companies and individuals may be considered as two related parties to a transaction.
The main criterion is ownership interest, where one of the parties directly or indirectly owns at least 25% of the capital or voting rights of the other party. However, there are particular cases in which parties are deemed related where:
- A loan that one party has made or for which it has provided security to the other party amounts to 50% of the balance sheet value of all the assets of the other party
- One party directly or indirectly derives at least 25% of its income from the performance of the co-operation agreement between both parties
- One of the parties is a permanent establishment of the other party.
The parties to a transaction may be deemed related if one of them is a resident of a low-tax country unless the taxpayers are able to prove that they are not related.
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Controlled transactions
Only transactions occurring in foreign trade between related persons are classified as controlled transactions without restrictions or thresholds on amounts of income or types of operations.
The TP rules introduce the concept of a transfer pricing agreement, which is an agreement concerning an operation or series of operations where all the following conditions are met:
3. The operation is a cross-border operation.
In this respect, a cross-border operation is an operation that takes place between:
TP methods
The TP rules lay down 5 methods of determining market prices that are similar to those used in international practice (a combination of methods may be used), and specifically:
The rules do not establish any order of priority for using the methods other than according first priority to the CUP method as the most precise and reliable method of applying the market principle to resources sold by users of natural resources.
Taxpayers may also use other TP methods besides the 5 prescribed by the TP rules if they can demonstrate that both the following conditions are met:
The TP rules provide that taxpayers that are parties to controlled transactions must independently determine and adjust their income, expenses, profits and losses in line with the market principle. However, taxpayers do not have the right to adjust prices or mark-ups themselves if the taxpayer’s profit margin is found to be outside the market profit margin range. This may prove a significant limitation for taxpayers that use the TNMM or the TPSM and may result in double taxation for those multinational companies that would be forced to make such adjustments in other jurisdictions.
Only transactions occurring in foreign trade between related persons are classified as controlled transactions without restrictions or thresholds on amounts of income or types of operations.
The TP rules introduce the concept of a transfer pricing agreement, which is an agreement concerning an operation or series of operations where all the following conditions are met:
- The purpose of the operation is:
- The supply or purchase of property or services
- The handling of intangible or tangible assets
- Credit provision.
3. The operation is a cross-border operation.
In this respect, a cross-border operation is an operation that takes place between:
- A resident and a non-resident, except where the operation takes place wholly in Tajikistan
- Two residents where the activities of one or both are carried on through a permanent establishment outside Tajikistan
- Two non-residents, unless the operation relates to activities carried on through permanent establishments in Tajikistan by both non-residents.
TP methods
The TP rules lay down 5 methods of determining market prices that are similar to those used in international practice (a combination of methods may be used), and specifically:
- The comparable uncontrolled price (CUP) method
- The resale price method
- The cost plus method
- The transactional net margin method (TNMM) and
- The transactional profit split method (TPSM).
The rules do not establish any order of priority for using the methods other than according first priority to the CUP method as the most precise and reliable method of applying the market principle to resources sold by users of natural resources.
Taxpayers may also use other TP methods besides the 5 prescribed by the TP rules if they can demonstrate that both the following conditions are met:
- None of the methods is suitable to determine whether income, expenses, profits and losses arising under a transfer pricing agreement are consistent with the market principle
- The method to be used produces a result that is comparable with the results obtained in relations between unrelated persons operating under market conditions.
The TP rules provide that taxpayers that are parties to controlled transactions must independently determine and adjust their income, expenses, profits and losses in line with the market principle. However, taxpayers do not have the right to adjust prices or mark-ups themselves if the taxpayer’s profit margin is found to be outside the market profit margin range. This may prove a significant limitation for taxpayers that use the TNMM or the TPSM and may result in double taxation for those multinational companies that would be forced to make such adjustments in other jurisdictions.
Information sources
The TP rules do not contain a list of information sources that are to be used in determining whether controlled transaction prices are at arm’s length. However, taxpayers must use reliable information in applying any of the TP methods.
TP documentation
In accordance with the TP rules, taxpayers are obliged to prepare documents (contracts, delivery notes, customs declarations, copies of supporting documents) proving that controlled transactions satisfy the market principle.
The TP rules do not prescribe the format and structure of TP documentation beyond providing that TP documentation must state the basis for opting to use a particular TP method or combination of TP methods.
In this regard, in order for taxpayers to determine whether controlled transactions satisfy the market principle, the following must be taken into account:
TP documentation must be prepared and provided to the tax authorities before the filing of the annual profits tax return[3]. Penalties apply for failure to comply with TP documentation requirements.
The TP rules allow for the preparation of simplified TP documentation subject to agreement by the tax authorities with the Ministry of Finance of Tajikistan for the following categories of taxpayers and operations[4]:
However, the simplified TP documentation requirements do not apply to:
The TP rules do not contain a list of information sources that are to be used in determining whether controlled transaction prices are at arm’s length. However, taxpayers must use reliable information in applying any of the TP methods.
TP documentation
In accordance with the TP rules, taxpayers are obliged to prepare documents (contracts, delivery notes, customs declarations, copies of supporting documents) proving that controlled transactions satisfy the market principle.
The TP rules do not prescribe the format and structure of TP documentation beyond providing that TP documentation must state the basis for opting to use a particular TP method or combination of TP methods.
In this regard, in order for taxpayers to determine whether controlled transactions satisfy the market principle, the following must be taken into account:
- The respective strengths and weaknesses of each TP method
- An analysis of functions performed, assets used and risks assumed by each party (functional analysis)
- The comparability of the conditions of the controlled transactions and market conditions, and
- The reliability of adjustments used to eliminate differences.
TP documentation must be prepared and provided to the tax authorities before the filing of the annual profits tax return[3]. Penalties apply for failure to comply with TP documentation requirements.
The TP rules allow for the preparation of simplified TP documentation subject to agreement by the tax authorities with the Ministry of Finance of Tajikistan for the following categories of taxpayers and operations[4]:
- Distributors
- Those with a low volume of cross-border operations
- Medium-sized enterprises
- Intra-group services
- Credit arrangements and
- Technical services.
However, the simplified TP documentation requirements do not apply to:
- Royalties
- Licence fees
- Research and development agreements and
- Other intangible assets.
Country-by-country reports
The TP rules introduce the concept of the country-by-country report, which provides the tax authorities with information on global profits and taxes paid by large corporate groups operating in Tajikistan and may be used by tax authorities to assess TP risks.
From 2023, groups with global influence ("Groups") that have an annual turnover of 4.7 billion somoni[5] will be subject to requirements to prepare and file a Notification of Membership of Groups with Global Influence ("Notification") and country-by-country reports ("CbC report").
A CbC report must be prepared and filed with the tax authorities within 12 months after the end of a reporting period by residents of Tajikistan which are:
The information that a CbC report must contain[10] is broadly in keeping with BEPS Action 13[11].
The Notification must be prepared in the approved form[12] and filed with the tax authorities by the taxpayers mentioned in items 2 and 3 above by the end of the financial year to which the Notification relates.
General tax fines apply for non-submission of the CbC report and Notifications.
TP audits
A tax authority may carry out an audit and make adjustments to ensure that income, expenses, profits and losses arising in controlled transactions satisfy the market principle. A TP audit must be carried out by a tax authority based on the market principle and the TP methods used by the taxpayer.
The TP rules do not currently contain detailed regulations regarding the conduct of a TP audit by the tax authorities.
Penalty sanctions
Article 601 of the Tajik Tax Code prescribes the following fines for late filing of tax returns, tax statements and other types of tax reports based on the length of the delay:
Article 600 of the Tajik Tax Code provides for a fine of from 80 to 100[17] calculation units to be imposed for failure to comply with demands from tax officials.
Meanwhile, according to Article 599 of the Tajik Tax Code, evasion of taxes and other compulsory payments by means of concealment incurs a fine of from 150 to 200[18] calculation units.
The TP rules introduce the concept of the country-by-country report, which provides the tax authorities with information on global profits and taxes paid by large corporate groups operating in Tajikistan and may be used by tax authorities to assess TP risks.
From 2023, groups with global influence ("Groups") that have an annual turnover of 4.7 billion somoni[5] will be subject to requirements to prepare and file a Notification of Membership of Groups with Global Influence ("Notification") and country-by-country reports ("CbC report").
A CbC report must be prepared and filed with the tax authorities within 12 months after the end of a reporting period by residents of Tajikistan which are:
- Parent companies of groups
- Authorised (surrogate) parent companies of Groups
- Members of Groups where the parent companies of those Groups are not required to submit CbC reports in their countries of residence and the Groups have not designated authorised (surrogate) parent companies
- Members of a Group where one of the following conditions exists between Tajikistan and the country of residence of the ultimate parent companies of the Groups ("secondary filing")[6]:
- There is no competent authority agreement[7],[8] or
- There is a competent authority agreement, but the country of residence regularly fails to comply with the requirements of that agreement[9].
The information that a CbC report must contain[10] is broadly in keeping with BEPS Action 13[11].
The Notification must be prepared in the approved form[12] and filed with the tax authorities by the taxpayers mentioned in items 2 and 3 above by the end of the financial year to which the Notification relates.
General tax fines apply for non-submission of the CbC report and Notifications.
TP audits
A tax authority may carry out an audit and make adjustments to ensure that income, expenses, profits and losses arising in controlled transactions satisfy the market principle. A TP audit must be carried out by a tax authority based on the market principle and the TP methods used by the taxpayer.
The TP rules do not currently contain detailed regulations regarding the conduct of a TP audit by the tax authorities.
Penalty sanctions
Article 601 of the Tajik Tax Code prescribes the following fines for late filing of tax returns, tax statements and other types of tax reports based on the length of the delay:
- Up to 10 working days — a fine of from 25 to 30[13] calculation units[14]
- From 10 to 30 working days — from 45 to 50[15] calculation units, and
- More than 30 working days — from 90 to 100[16] calculation units.
Article 600 of the Tajik Tax Code provides for a fine of from 80 to 100[17] calculation units to be imposed for failure to comply with demands from tax officials.
Meanwhile, according to Article 599 of the Tajik Tax Code, evasion of taxes and other compulsory payments by means of concealment incurs a fine of from 150 to 200[18] calculation units.
Permanent establishment
The TP rules also provide for the tax authorities to carry out TP audits in relation to transactions concluded with the involvement of permanent establishments in the following cases:
In conclusion
The TP rules as currently worded lack details regarding certain matters, such as:
Although the TP rules lack certain key points as listed above, it is our understanding that the assertion in the TP rules that the principle of the "conclusion of an agreement on market terms" must be applied in accordance with international TP standards will help ensure that the Rules are applied and subsequently developed in accordance with the OECD Guidelines.
How can B1 help?
In light of the TP rules in Tajikistan B1 is ready to provide the following support:
The TP rules also provide for the tax authorities to carry out TP audits in relation to transactions concluded with the involvement of permanent establishments in the following cases:
- Where the activities of one or both residents of Tajikistan are carried on via a permanent establishment outside Tajikistan and
- Between two non-residents, unless the operation relates to activities carried on via permanent establishments in Tajikistan by both non-residents.
In conclusion
The TP rules as currently worded lack details regarding certain matters, such as:
- The rules for calculating the market range of prices / profit margins
- The range of profit level indicators to be calculated when applying a particular TP method
- The ability for compensating adjustments to be made by a party to a transaction in relation to which an adjustment of the tax base has already been made by the other party
- Provisions exempting a taxpayer from fines
- Requirements relating to the format and structure of a Notification, a CbC report and TP documentation.
Although the TP rules lack certain key points as listed above, it is our understanding that the assertion in the TP rules that the principle of the "conclusion of an agreement on market terms" must be applied in accordance with international TP standards will help ensure that the Rules are applied and subsequently developed in accordance with the OECD Guidelines.
How can B1 help?
In light of the TP rules in Tajikistan B1 is ready to provide the following support:
- Analysing current transactions involving companies in Tajikistan and reviewing and assessing TP risks
- Developing and implementing TP policies and models with the involvement of companies from Tajikistan
- Preparing templates of TP documentation
- Preparing Notifications
- Preparing CbC Reports
- Carrying out benchmarking studies of prices/profit margins in relation to transactions with residents of Tajikistan
- Transfer pricing advice and planning for new transactions involving companies from Tajikistan.
[1] The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organisation for Economic Co-operation and Development ("the OECD Guidelines").
[2] The Tajik Tax Code does not provide a definition of the term "case". As we understand it, "cases" should be understood to mean transactions between unrelated parties (as occurring on market terms) and between related parties.
[3] The provisions of Article 241 of Chapter 35 of the Tajik Tax Code set deadlines for filing returns. According to clause 8, "The corporate income tax declaration and annual accounting statements, including the balance sheet, shall be submitted by 1 April of the year following the reporting year".
[4] The provisions of the Tajik Tax Code do not provide information regarding the structure of simplified documentation.
[5] Approximately 29.4 billion Russian roubles / 429.3 million USD / 407.1 million euros based on the average exchange rate of the somoni (using the values as at the last day of the month) to the Russian rouble / US dollar / euros for 2022 respectively based on data published by the National Bank of Tajikistan.
[6] The tax authority must notify the resident by the end of the period [B1: the criteria for determining that period are not expressly laid down in the relevant clause of the Tajik Tax Code] that it is subject to Secondary Filing for the reporting period.
[7] Meaning an Agreement between the competent authority of Tajikistan and the competent authority of a foreign state requiring the automatic exchange of CbC reports (The Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports — CbC MCAA of 27 January 2016).
[8] According to information available on the official website of the OECD (https://www.oecd.org/tax/beps/country-by-country-exchange-relationships.htm and https://www.oecd.org/ctp/exchange-of-tax-information/CbC-MCAA-Signatories.pdf), (1) with respect to Tajikistan there is no information on requirements relating to the structure of a CbC report and a Notification, (2) Tajikistan is not a signatory/party to the CbC MCAA.
[9] Regular failure to comply with the provisions of a competent authority agreement occurs where one of the following things happen:
[11] The Action Plan on Base Erosion and Profit Shifting.
[12] The Tax Code does not contain requirements relating to the structure of the Notification. [B1: we understand that the format has not yet been approved]
[13] Approximately from 10.6 to 12.8 thousand Russian roubles / from 155.3 to 186.3 US dollars / from 147.3 to 176.7 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[14] According to the law "On the State Budget of the Republic of Tajikistan for 2023", from 1 January 2023 1 calculation unit is set at 68 somoni.
[15] Approximately from 19.2 to 21.3 thousand Russian roubles / from 279.5 to 310.6 US dollars / from 265.1 to 294.5 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[16] Approximately from 38.4 to 42.6 thousand Russian roubles / from 559 to 621.1 US dollars / from 530.1 to 589 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[17] Approximately from 34.1 to 42.6 thousand Russian roubles / from 496.9 to 621.1 US dollars / from 471.2 to 589 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[18] Approximately from 63.9 to 85.2 thousand Russian roubles / from 931.7 to 1 242.2 US dollars / from 883.5 to 1 178.1 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[2] The Tajik Tax Code does not provide a definition of the term "case". As we understand it, "cases" should be understood to mean transactions between unrelated parties (as occurring on market terms) and between related parties.
[3] The provisions of Article 241 of Chapter 35 of the Tajik Tax Code set deadlines for filing returns. According to clause 8, "The corporate income tax declaration and annual accounting statements, including the balance sheet, shall be submitted by 1 April of the year following the reporting year".
[4] The provisions of the Tajik Tax Code do not provide information regarding the structure of simplified documentation.
[5] Approximately 29.4 billion Russian roubles / 429.3 million USD / 407.1 million euros based on the average exchange rate of the somoni (using the values as at the last day of the month) to the Russian rouble / US dollar / euros for 2022 respectively based on data published by the National Bank of Tajikistan.
[6] The tax authority must notify the resident by the end of the period [B1: the criteria for determining that period are not expressly laid down in the relevant clause of the Tajik Tax Code] that it is subject to Secondary Filing for the reporting period.
[7] Meaning an Agreement between the competent authority of Tajikistan and the competent authority of a foreign state requiring the automatic exchange of CbC reports (The Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports — CbC MCAA of 27 January 2016).
[8] According to information available on the official website of the OECD (https://www.oecd.org/tax/beps/country-by-country-exchange-relationships.htm and https://www.oecd.org/ctp/exchange-of-tax-information/CbC-MCAA-Signatories.pdf), (1) with respect to Tajikistan there is no information on requirements relating to the structure of a CbC report and a Notification, (2) Tajikistan is not a signatory/party to the CbC MCAA.
[9] Regular failure to comply with the provisions of a competent authority agreement occurs where one of the following things happen:
- The exchange of information provided for in the competent authority agreement with Tajikistan has been suspended, other than the suspension of the exchange of information in accordance with an agreement, or
- Despite all efforts made by Tajikistan, the exchange of information with countries in which the Group operates has not taken place.
[11] The Action Plan on Base Erosion and Profit Shifting.
[12] The Tax Code does not contain requirements relating to the structure of the Notification. [B1: we understand that the format has not yet been approved]
[13] Approximately from 10.6 to 12.8 thousand Russian roubles / from 155.3 to 186.3 US dollars / from 147.3 to 176.7 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[14] According to the law "On the State Budget of the Republic of Tajikistan for 2023", from 1 January 2023 1 calculation unit is set at 68 somoni.
[15] Approximately from 19.2 to 21.3 thousand Russian roubles / from 279.5 to 310.6 US dollars / from 265.1 to 294.5 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[16] Approximately from 38.4 to 42.6 thousand Russian roubles / from 559 to 621.1 US dollars / from 530.1 to 589 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[17] Approximately from 34.1 to 42.6 thousand Russian roubles / from 496.9 to 621.1 US dollars / from 471.2 to 589 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
[18] Approximately from 63.9 to 85.2 thousand Russian roubles / from 931.7 to 1 242.2 US dollars / from 883.5 to 1 178.1 euros based on the average exchange rate of the somoni (using values as at the last day of the month) to the Russian rouble / US dollar / euro for 2022 respectively, based on data published by the National Bank of Tajikistan.
Authors:
- Ruslan RadzhabovPartner
- Vasilii AnishchenkoAssociate Partner
- Yuriy MikhailovDirector
- Olga LapitskayaAssistant Manager
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