The concept of transfer pricing appeared at the beginning of the twentieth century in the conditions of the formation of market relations.
History of occurrence
With the development of capitalism, common approaches were gradually developed in determining the final value of a transaction. At a time when the general growth of companies and their entry into international markets was reflected in the active formation of corporations and holdings, certain rules were developed, and such a concept as transfer pricing appeared.
The first country that in the middle of the last century managed to consolidate the main provisions of this process at the legislative level is the United States. Many states, including Russia, consolidated their transfer pricing standards much later, based on the experience of the United States. In our country, this concept was developed after the collapse of the USSR, namely with the advent of market relations in the economy in the nineties of the twentieth century.
What does transfer pricing mean?
This concept represents the most optimal system to minimize the tax burden. Moreover, it is used not only by large taxpayers, but also by representatives of medium and small businesses.
In the conditions of market relations between counterparties, payment for goods, work and services is carried out under contracts at market prices. But this does not always happen. To optimize taxation, some counterparties set their internal (transfer) prices, which helps to significantly save on taxes.
Any type of economic activity is aimed at making a profit, that is, at enrichment. Acting within the framework of the law, companies strive to get even greater profit by reducing the tax burden.
Transfer price concept
This is a price formed by subjective characteristics that allows you to manage and redistribute both the income and expenses of the “related” counterparties. It can be used within dependent companies such as holdings and corporations, as well as between branches and structural divisions within the company.
Features of transfer pricing in the Russian Federation
Various schemes of "transfer" pricing, of course, do not suit the state, whose main function is the collection of taxes to the budget. Therefore, in order to exercise proper control, the Federal Law (No. 227-ФЗ dated 18. 07. 2011) was adopted that regulates this process, which entered into force on January 1, 2012 (as amended on 05. 04. 2013), and Section V.1 of the Tax Code. They disclose the basic concept within the framework of controlled transfer pricing transactions in the Russian Federation.
Interdependent persons suggest direct or indirect participation of both individuals and legal entities in the structure of another organization (at least 25%) or managers (at least 50%). This may be the only sole executive body, as well as immediate relatives, guardians and wards. Operations between related parties are regulated by Art. 105.3 of the Tax Code.
Transfer pricing methods
For this process, the legislation of the Russian Federation provides for the following methods prescribed in Articles of the Tax Code of the Russian Federation (Art. 105.7-105.13):
- The method of comparability of market prices is traditional and is based on gross profit.Due to the fact that a single position of tax and taxpayers on what prices should be taken into account has not yet been developed, there are constant disputes. Judicial practice on this issue is also heterogeneous. Before you start using, you need to analyze prices within the company with similar prices among unrelated persons.
- The cost pricing method is cost-based. The value of profitability should be within a certain interval, then the price by the regulatory authorities will be recognized as market. If the value is set outside the minimum, then the price will be calculated at actual costs, subject to cost-effectiveness at the lowest interval value.
- The follow-up method is based on a comparison of gross margin taking into account the market interval as a result of resale.
- The method of comparable profitability means comparing operating profitability taking into account the market interval.
- Profit sharing method. The profit received is compared and distributed among all parties to the transaction in proportion to: contribution to the total profit, distribution of profitability and distribution between the parties. Combination of methods is allowed.
Types of companies covered by Federal Law No. 227
Under the current legislation, the following types of companies can be distinguished:
- Organizations that have a direct relationship, that is, are interdependent, which can affect not only the result, but also the process of activity.
- Organizations carrying out transactions that are equated with interdependent. This includes formal intermediaries, operations on exchanges, and transactions with non-residents.
Goals of using transfer prices
The main goals of transfer pricing are to move the tax base with the help of affiliates in companies registered in areas with the most favorable tax regime. Such a procedure can be carried out by changing the transaction price.
With the development of production, the emergence of large taxpayers and their entry to the international level, transfer pricing has become urgent.
Examples:
- Two subsidiaries X and Y in different countries operate. Country Y has a more favorable tax climate. By adjusting the price in country Y to increase, when selling goods to country X, you can underestimate the amount of tax. Company X will have a clear understatement of taxable profits.
- For subsidiaries X and Y, they operate in different countries, and in one of them (Y) additional taxes on capital transfer are established at the legislative level. Consequently, profits can be redirected to country X. To do this, you need to increase prices in company Y.
From the point of view of the regulatory body, the objectives are aimed at the following:
- an obstacle to the use of transfer prices for tax evasion;
- opposition to their use in order to withdraw money from the country.
Transfer pricing objectives
The peculiarity of the development of such prices is a unified approach of the management team and is somewhat different from the usual pricing.
The following tasks are performed:
- The ability to regulate the process of distribution or redistribution of profit between the structural divisions of the company (subsidiaries and parent).
- Reduction of not only tax, but also customs payments.
- Reducing the risks of companies.
- The ability to distribute sales markets and influence international markets between their structural divisions.
- The ability to intentionally underestimate part of the profits in subsidiaries in order to avoid an increase in employee salaries in the case of individual requirements.
These transactions do not apply to property rights, intellectual activity and information. The object of control are goods, works, services.Such operations exist in order to optimize taxation in terms of replenishment in the budget.
Features of taxation
Transfer pricing taxation has certain properties. If the actual price in the transaction does not correspond to the market parameters, then, in accordance with the legislation of the Russian Federation, the taxpayer has the right to independently determine its size. The main thing is that such calculations do not entail an understatement of taxes or an increase in costs. This, of course, will arouse interest from the inspection bodies. In the event that an error is discovered, the taxpayer must make the necessary adjustments, submit a clarifying tax return with the obligatory attachment of an explanation, based on which a specific transaction can be identified.
Transfer pricing and tax control
Every year until May 20, organizations are required to report to the tax inspectorate by submitting an appropriate notice, which should contain detailed information about all transactions that have the status of controlled transactions. This notice must be submitted by all participants in the transaction. Thus, double control is exercised. Inspecting authorities can independently verify the existence of such transactions.
For the control of the tax authorities, it is sufficient to have the fact of the transaction, falling under the status of controlled. The main purpose of this audit is to identify compliance or non-compliance with the level of market prices during the operation.
Entering the international market
International transfer pricing was actively developed in the 60s of the last century. Some of the largest companies with transnational status have developed a more subtle and civilized way of "robbing" the former colonial states, which gained their independence by this period. Prices for the purchase of raw materials in these countries were intentionally low.
In the global economy, generally accepted international principles, documents, and manuals have been developed. They are advisory in nature and help to solve many issues in the field of transfer pricing.
Each country has the right to independently determine the control and adjustment of transfer prices. Moreover, it becomes quite obvious that the process of adjusting the above prices of the audited company is carried out by the regulatory authorities of the two countries (based on the submitted reports). If such procedures are not performed, then the controlled entity is in a double tax situation. According to the legislation of the Russian Federation, the competent authorities can do the following:
- remove all requirements;
- take the risk and terminate the company by withdrawing already invested investments and refusing new ones.
In this situation, it is important to assist in the process of adjusting the transfer price between regulatory authorities of different countries. For any state in the international arena, the priority is the profitability of its own budget. Therefore, the question arises: how prepared are countries for cooperation in the process of forming transfer pricing?
Recently, there has been a tendency for interference of inspection bodies in the transfer process. Such actions by tax authorities provoke transfer pricing risks, which:
- increase the costs associated with conducting counter control functions of organs;
- may provoke the risk of double taxation;
- dragged into litigation and costs;
- they will incur financial losses if adjustments are made at the initiative of another state.
In general, the outlined tendencies of attention from the fiscal authorities have developed certain regulatory mechanisms, thanks to which it is possible not only to increase the revenue side of the budget, but also to strengthen the tax system in the country.
