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 KAZAKHSTAN International Business Magazine №3, 2006
 Transfer Pricing Legislation. An Overview and Practice in the CIS
Transfer Pricing Legislation
An Overview and Practice in the CIS
Bill Page, Partner, Deloitte (Moscow)
Transfer pricing legislation and practice in the countries of the Commonwealth of Independent States varies significantly. In some countries (for example, Kazakhstan and Russia), legislation and practice is evolving rapidly, whereas in others, transfer pricing rules are still in their initial phase of development, and tax authorities raise transfer pricing issues only when they detect obviously abusive pricing. (Examples of such regimes include Azerbaijan and Ukraine.) In yet other CIS countries (for example, Belarus and Uzbekistan), the tax legislation contains no explicit transfer pricing rules at all. A summary of some of the key rules in the four most developed jurisdictions (Russia, Kazakhstan, Ukraine, and Azerbaijan) is attached. International experience shows that the rational enforcement of a comprehensive transfer pricing framework can significantly stimulate tax collections. Still, in most CIS countries, court rulings in transfer pricing cases have tended to favor taxpayers rather than the tax authorities.
Transactions Subject to ‘Control’ by Tax Authorities
In general, where more developed transfer pricing rules have been enacted, the tax authorities focus on transactions between related parties, barter transactions, and transactions involving exports or imports of goods or services.
Some countries also extend the scope of transfer pricing to a fourth category: transactions in which the price deviates from a specific corridor defined by reference to the market price applicable to the same or similar types of goods, works, or services. This is usually referred to as the "safe harbor" rule. It functions as follows: If the arm’s-length price of a widget is $100, and if the safe harbor is 20 percent, the tax authorities may challenge pricing in transactions only if widgets are sold to a related party for less than $80 or for more than $120. The safe harbor corridor varies from zero percent in Kazakhstan to 20 percent in Russia and 30 percent in Azerbaijan. However, Kazakhstan is considering increasing its deviation threshold to 5 percent for several categories of transactions.
Common themes running through CIS transfer pricing regimes that have proved controversial in practice are the application of tax controls to transactions that are not cross-border.
Methods for Determining Market Prices
The more sophisticated rules in Kazakhstan and Russia use the familiar methodologies of the OECD guidelines to determine arm’s-length prices: the comparable uncontrolled price (CUP) method; the resale price method; and the cost plus method. Preference usually is given to the first method, while the other two may be used only in the absence of comparables or information about relevant prices in that market. Also, transfer pricing rules in some countries (for example, Azerbaijan) explicitly allow the use of an expert in determining the market price.
When determining the market price for comparable transactions, the tax authorities often meet with difficulties, particularly because of a lack of official data regarding market prices. In some cases, courts may deem sufficient a document issued by the regional statistical board that states that no information about the market prices for particular kinds of goods (or works or services) is available. However, the tax authorities may try to make a more comprehensive search for comparables. Not only do they ask the statistics authorities, they also try to obtain information from customs authorities, chambers of commerce, or local administrations responsible for price monitoring and regulation. However, it often is difficult for the tax authorities to assess the impact of variables such as volume discounts, credit terms, and quality differences in determining arm’s-length prices even for commodities such as metals and crude oil. It is even more challenging to address issues such as interest rates on intragroup loans, transactions involving intellectual property, and intragroup services. The use of "secret comparables" by tax authorities in CIS countries has not been consistent, though there have been isolated cases. Generally, the burden of proving prices do not meet the arm’s-length principle is the responsibility of the tax authorities. However, in Russia, where litigation on transfer pricing is increasingly common, the taxpayer still must be prepared to provide the tax authorities or the courts with sufficient evidence that its market price estimations are reasonable.
When the tax authorities determine that the income of an entity is understated as a result of a sale of goods at a price lower than market price, that entity should adjust its income accordingly in calculating its profit tax liabilities. Penalties and interest on unpaid tax will be due as a result of any adjustments made. There is no provision in the domestic tax regulations of any CIS country that would enable the other party to the transaction to make a corresponding adjustment, which would increase the cost of the purchased goods by the same amount as the seller increased its gross revenue.
The Future
Transfer pricing is one of the biggest tax headaches facing multinational corporations around the world. Time and again, tax authorities have found it to be one of the most lucrative areas for raising tax revenue. For the same reason, transfer pricing undoubtedly will become more significant in the future in every CIS jurisdiction. In some places, the adoption of OECD-style rules is still in the future; in others, the rules are already in place, but the tax authorities are in the process of honing their skills and increasing their expertise and enforcement powers.
Based on these trends, companies in the CIS should be implementing policies and procedures to identify and manage transfer pricing risks to ensure that their transactions will not be challenged by the tax authorities.

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