Approach to reporting on transfer pricing in the CIS countries

Iugina Anastasiia Andreevna Master’s Degree, the department of Taxes and Taxation, Financial University under the Government of the Russian Federation 107014, Russia, gorod Moskva, g. Moscow, ul. Sokol'nicheskaya Ploshchad', 9, kv. 64 aayugina@ya.ru Other publications by this author

Introduction

In the last 5 years, the volume of requirements imposed on taxpayers in various jurisdictions has grown significantly. In this regard, the relevance of the analysis of the causes of such changes, differences in the reporting criteria and reporting forms used by individual countries increases. The purpose of this analysis is to find the reasons for the introduction of additional reporting forms for taxpayers in the CIS countries, to identify their differences in individual jurisdictions and patterns regarding the introduction of separate requirements for reporting on transfer pricing (hereinafter referred to as "TP").

Material and methods of research

The theoretical basis for the study is the research of tax administrations, the OECD and individual researchers in the field of TP, and the empirical base is the existing legislative acts of individual CIS countries and their proposed changes. The object of the study is the provisions of the legislation of the analyzed countries in the field of transfer pricing, and the subject of the study is the main regularities of regulation, as well as differences in the reporting requirements for transfer pricing. The methods used in the analysis include both general scientific - analysis, classification, and private scientific, for example, the comparative legal method.

The main directions of regulation

Among the obligations of taxpayers in the field of TP, currently operating in the CIS countries, there are both traditional forms of reporting – notification of controlled transactions, documentation on TP, and recently introduced requirements for the preparation of three–level reporting - national documentation (Local file), global documentation (Master file), country report (CbCr). The main reason for the changes in legislation aimed at increasing the volume of reporting on TP was the ability of TNCs to redistribute profits in such a way that significant amounts of it were in low-tax jurisdictions, reducing the effective tax rate for the group of companies to extremely low values. The possibility of manipulating the level of profit, and, accordingly, tax deductions at ad valorem rates using the transfer pricing mechanism has historically been noted by a significant number of both foreign and Russian researchers and has not caused any discussion in the scientific community ^[8,9,10], however, in modern conditions this issue has become most relevant due to the scale of abuse.

In particular, as an example, the case of Apple Inc., an American corporation that used a significant number of offshore structures, agreements and transactions to move profits from the United States to Ireland, where Apple had a special tax rate of less than 2%. As a result of such actions and the use of legislative gaps, the group managed to evade taxes on profits in the amount of $44 billion over the four-year period from 2009 to 2012 ^[11]. According to one of the studies conducted at that time, it was revealed that 30 of the largest TNCs located in the United States, whose revenues amount to more than $ 160 billion, over a three-year period did not pay taxes in the United States in principle, using numerous offshore zones that allowed them to control the volume of profits in the United States, and, accordingly, taxes paid ^[12].

Due to the possibility of such actions by taxpayers, the approach to preparing reports on TP has changed significantly. Thus, after the publication of the BEPS plan (a package of measures to counteract the erosion of the tax base and the movement of profits) in 2013, the requirements for disclosure of information by the taxpayer in the field of TP have also changed. While maintaining the previously valid recommendations on the formation of transfer prices, detailed in the OECD Guidelines on Transfer Pricing for TNCs and Tax Authorities, Step 13 of the BEPS plan made it possible to prevent the transfer of profits to low-tax jurisdictions by increasing the level of data disclosure.

Nevertheless, when establishing additional reporting obligations, the context of the existing level of motivation of taxpayers to comply with the legislation is important. Similarly to the possibility of reducing tax collection with an increase in the tax rate, with an excessive load under the special rules of tax control for TP, a situation may occur in which the benefits of making controlled transactions will be lower than the taxpayer's costs for preparing the required documents. In addition, an important factor is the expediency of state control and administration of individual transactions – for example, in relation to extremely insignificant transactions, the costs for the state budget will be disproportionately high in comparison with the possible additional revenues of state budgets ^[13].

Requirements for filing three-level reports

To date, not all CIS countries have introduced relevant legislative provisions requiring the provision of three-level reporting. For example, similar requirements have already been introduced in Russia and Kazakhstan, but to date have not yet been introduced in Belarus, Armenia, Georgia, where reporting requirements remain the same. The reasons for this difference may include both a lengthy process of preparation and adoption of relevant legal acts, and the intention to reduce the level of administrative burden of TNCs to stimulate their activities in developing countries. In addition, in some jurisdictions, the share of TNC operations in comparison with national companies may not be so significant that the formation of TP rules is a priority in comparison with other areas of improvement of the tax system.

When comparing the volume of claims within the CIS countries, it is obvious that the number of documents prepared by taxpayers is very different. A detailed analysis of the requirements is presented in the table below.

Table 1 - Reporting requirements in various CIS countries

The scientific literature notes the need to introduce TP rules in those CIS countries where such rules are not yet available. In particular, such recommendations are formed taking into account the Russian experience, in which the introduction of TP rules allowed to increase the amount of taxes paid^[14]. In particular, such a need is due to mutual integration and globalization, as a result of which the possibility of manipulating the tax base at the international level is formed through the use of specific low-tax jurisdictions^[13].

Requirements for submitting notifications

As can be seen from the table presented above, a fairly large number of countries establish a separate form of notification of controlled transactions, in addition to the generally accepted three-level reporting or documentation on TP in the world practice. In practice, the notification is a fairly simple document designed to inform the tax authorities about the fact of controlled transactions, however, for most CIM, the control of compliance with the rules of the TP in which is carried out at the global level, the very fact of the existence of such a separate form is quite specific, since there are no such forms in the OECD countries. In this regard, the experience of Ukraine is particularly interesting, where, like most Western countries, an appendix to the main annual tax return is filled in, and a report on controlled transactions is also submitted in addition to it.

The preparation of a separate notification, indeed, somewhat increases transaction costs for taxpayers. Nevertheless, taking into account the simplification of the administration of controlled transactions for the tax authorities, it can be noted that the introduction of requirements for filing such a notification is not excessive. Taking into account the effectiveness of such practices in some CIS countries, it is unlikely that taxpayers' obligations regarding the submission of notifications on controlled transactions will be reduced.

Another form of notification required by individual CIS countries is notification of participation in the CIM. Such a form appeared after the introduction of the rules on filing three-level reporting and is not aimed at analyzing any transactions in an automated mode, but solely at identifying those CIM to which the requirements for filing three-level reporting apply. Thus, the main purpose of receiving such notifications by the tax authorities is to determine a potential list of companies for further requesting three–level reporting.

It should be noted that with regard to this type of notification, there are examples of inaccuracies in legislation that increase the administrative burden on taxpayers. Thus, in accordance with the Law of the Republic of Kazakhstan on Transfer Pricing, there may be a situation in which a taxpayer, who is not subject to the requirements for filing three-level reporting, is nevertheless obliged to submit an application for participation in the CIM. Taking into account the possibility of reducing the costs of tax administration by reducing the number of verified applications, it is likely that such legislative requirements will be canceled or modified in the future.

In terms of the availability of specific requirements for the form of submission of documentation on TP (Local file) in certain jurisdictions, it should be noted that there are extremely significant differences. Thus, in the Republic of Belarus, data may be requested by the tax authority not for the whole year, but for a separate period (for example, a quarter or half a year), respectively, taxpayers prepare documentation on the TP on an annual basis, but directly filling in the information in the form established by the Ministry of Taxes and Duties of the Republic of Belarus is carried out only after receiving request from the tax authorities. In the Republic of Kazakhstan, a different approach was chosen – a reporting form was established, which generally coincides with the global approach to the preparation of documentation, but has its own characteristics.

The approach to the formation of such requirements in individual countries, or the absence of a fixed form of documentation, as in Russia, depends largely on the breadth of application of the TP rules – as a rule, if a taxpayer is preparing documentation for the first time, providing a certain form for filling out effectively prevents the preparation of incomplete or non-informative documentation. With this in mind, it is likely that certain forms of documentation will be introduced in other CIS countries, in which there is no practice of applying the TP rules yet.

Conclusions

The most common characteristic is the trend towards a general increase in the volume of reporting in all CIS countries that have adopted the TP rules. Accordingly, the following can be distinguished as the main patterns of development::

·        General increase in the obligations of taxpayers engaged in controlled transactions;

·        Introduction of TP rules by countries that previously had no such rules;

·        The adoption of Step 13 of the BEPS plan by countries that previously had TP rules, and the addition of local rules with requirements for filing three-level reporting.

Thus, in general, it can be noted that there is a tendency to increase the administrative burden on taxpayers, as well as an increase in the amount of information disclosed to tax authorities by taxpayers.