Transfer pricing regulations in the context of sanctions
Another two FTS Letters which we regard as important are devoted to transfer pricing in the context of the rising sanctions pressure on Russian companies.
In particular, Federal Tax Service Letter
No. ShYu-4−13/2724@ of 5 March 2022 refers to the possibility of discounts being applied in foreign trade transactions in light of sanctions
, including in transactions with foreign unrelated entities.
According to the Letter:
- The imposition of sanctions on Russian government authorities, individuals and legal entities by "unfriendly" countries (meaning the United States and those foreign states and international organisations that have aligned themselves with the United States) affect the economic conditions of the activities of parties to transactions.
- It is acknowledged that losses may arise in foreign trade transactions as a result of the actions of "unfriendly" countries, resulting in a situation where taxpayers sell their products at discounted prices.
- When conducting transfer pricing inspections and considering applications for advance pricing agreements, tax authorities will consider those circumstances and their impact on the results of transactions that are classed as controlled in accordance with Article 105.14 of the Tax Code.
Furthermore, in Federal Tax Service Letter No. ShYu-4−13/7523@ of 20 June 2022
the Interregional Inspectorate of the Federal Tax Service for Pricing for Taxation Purposes and Interregional Inspectorates of the Federal Tax Service for Major Taxpayers were informed of the need to take account of circumstances that influence pricing in transactions
The Federal Tax Service identifies the following objective factors influencing the production and sales activities of companies in the current economic circumstances:
- Measures to prevent surpluses of finished products
- Hold-ups in the manufacturing cycle
- Job cuts
- Forced changes to established arrangements for the sale of products, including changes in logistics chains
- Corresponding changes in sale prices to facilitate sales of products
Further to the above, we are seeing that most companies with cross-border dealings are coming up against the emotional component of sanctions, whereby a particular product or entity may not be formally affected by restrictions, but the following difficulties arise:
- In addition to sanctions, many foreign partners (suppliers, customers, transport and logistics companies, investors, production and distribution partners) are pressured by regulators and growing reputational risks into abandoning ties with Russian companies.
- Difficulties with bank payments.
- Retaliatory measures by Russia also have a major impact on relationships with foreign partners.
As a result of mutual sanctions, many Russian companies have found themselves facing significant problems and risks, such as:
- The risk of the suspension of activities of foreign entities registered in "unfriendly jurisdictions" (including trading and holding entities)
- The risk of the disruption or collapse of supply chains as result of foreign suppliers, customers and transport and logistics companies refusing to deal with Russian entities
- The risk of the refusal by certain banks to service accounts held by Russian companies or persons (including entities in which there is Russian ownership).