TP Documentation: Structure & Tips

Alexander Simonov

June 6, 2013

TP reporting: Notification and Documentation

Mandatory reporting

Notification Documentation

Upon request from the tax authorities, but not earlier than 1 June of the subsequent year (for

2012 – not earlier than 01/12/2013). Free format.

Standardized form. Should be submitted annually, not later than 20 May of the year following the

reporting period (for 2012 – by 20/11/2013)

30 working days

Income from all transactions with certain related party: 2012 – above 100 MRUB; 2013 – above 80 MRUB

Starting from 2014 – all transactions

TP Notification

Information that should be included:

General information about the transaction:

• Type of interdependence with the counterparty

• Use of regulated prices

• Pricing methods, the source of information – for information only

• Amount of income/expenses for the year based on accounting data

Information about the object of transactions:

• Name, TNVED code, OKP, OKVED

• Number and date of the contract

• Place of loading of goods

• Place of transaction, address for unloading of goods

• Code of condition of supply – INCOTERMS

• Unit of measurement

• Quantity, price, cost

• Date of transaction = date of income recognition under the accounting

TP Documentation

Art. 105.17(5) of the Russian Tax Code:

For tax control purposes the tax authorities must apply the same

methods, as applied by the taxpayer and described in TP Documentation

Application other methods by the tax authorities is possible only if the

tax authorities prove that the method applied by the taxpayer does not

allow to determine the compatibility of commercial and (or) financial

conditions of controlled transaction with conditions of comparable

transactions between the parties, which are not related

Do not let the tax authorities establish their own rules of the

game – by timely preparation of TP Documentation you shift

the burden of proof to the tax authorities!

TP Documentation

Information that should be included:

About the taxpayer’s activity: • List of parties with which the controlled transaction is made, description of the controlled

transaction, its conditions, including description of the TP method, terms and conditions of payments for the transaction

• Information about the functions performed by the parties of the transaction, about the assets used by the taxpayer, about the taken economic (commercial) risks

Information about the used TP methods: • Substantiation of selection of TP method and algorithm of its application

• Indication of the sources of information

• Calculation of market prices range on controlled transaction with description of the approach used to select comparable transactions

• Amount of income/profit and/or expenses/loss on the controlled transactions

• Information about the economic benefit received from the controlled transaction

• Information about other factors that have an impact on the price (profitability), applied in controlled transaction, including information about the market strategy of the taxpayer

TP Documentation: Structure

Industry analysis (description of the business, industry and relevant markets)

Company analysis (general information about taxpayer, description of business segments and product lines)

Functions / Assets / Risks (FAR) Analysis (what functions does the Company peform in the transaction? what is the level of its risk? What assests were used to fulfil the obligations? What resources were contributed?)

TP method selection (substantiation why the exact method was chosen)

Comparative analysis (Benchmarking study) (information sources, selection of comparable companies and transactions)

Results (calculation of the market price, conclusion)

TP Documentation: Industry analysis

Short description of industry and relevant markets aimed to uncover key

features of business and value drivers

Input

• Industry structure

• Nature of competition

• Cost structure and conditions

• Regulatory and political trends

• Market and competitor trends

Main Output

• Competitive advantage

• Key processes and value drivers

• Key risks

• Comparable transactions

• Comparable companies

• Influences on pricing

TP Documentation: Company analysis

Short description of business, product/service lines aimed to uncover key

value drivers to the particular company

Input

• Business overview

• Group profile (history, facts and figures)

• Strategy

• Organizational structure

• Competitive position

• SWOT analysis

• Financial performance

Main Output

• Company-specific sources of competitive advantage (value drivers, core competencies, core capabilities & assets)

• Key risks

• Transaction map

• Management model

TP Documentation: Functions / Assets / Risks (FAR) analysis

An analysis of business from the perspective of the functions performed,

assets used and risks assumed

Input

• Processes/functions performed

• Resources used

• Intangible assets

• Risks taken

• Transaction terms

Main Output

Relative compensation earned by the related parties should correspond to their relative contribution of functions performed, exposure to risk, and intangible property

TP Documentation: Economic analysis

Structure of economic analysis:

Choice of method for each transaction

• Comparable Uncontrolled Price Method (CUP)

• Resale Minus Method

• Cost Plus Method

• Comparable Profitability Method

• Profit Split Method

Search for the information in available sources

Unloading of necessary information, manual selection of comparable data

Calculation of the market range of prices/profitability

Conclusion:

• Transfer price is justified or

• There is a need to correct tax payments

Example of economic analysis: Intragroup loan

Conditions of the transaction:

1. Date of loan: 01.07.2011

2. Amount of loan: 200 million USD

3. Rate of the loan: LIBOR + 20 bps

4. Term of the loan: 3 years

5. Interests are calculated and paid each month

The purpose of the analysis: to determine whether the interest rate meets

the market level

Example of economic analysis: Intragroup loan

Steps of the comparative analysis:

1. Determination of the credit rating of the Borrower

2. Analysis of the contract, determination of the main details of the transaction

3. Choice of the appropriate database and unload of comparable transactions

4. Calculation of the market range

Example of economic analysis: Intragroup loan

Step 1. Determination of the credit rating of the Borrower:

Available databases: Standard & Poor’s, Moody’s, FitchRatings

Calculate ratings, using the program Moody’s KMV RiskCalc

Example of economic analysis: Intragroup loan

Step 2. Analysis of the contract, determination of the main details of the transaction:

Type of interest rate (fixed, “floating”)

Type of loan (renewable, on the term)

Loan currency

Loan amount

Country of registration and sphere of activity of the Borrower

Country of registration of the Lender

Availability of guarantor

Date of loan

Maturity dates

Example of economic analysis: Intragroup loan

Step 3. Choice of the appropriate database of comparable transactions:

For fixed rates – database Bloomberg:

a) Separate system, not available via Internet

b) possibilities:

search of bonds issued by the companies

derivative transactions

construction of the yield curve

Example of economic analysis: Intragroup loan

Step 3. Choice of the appropriate database of comparable transactions:

For “floating” rates– Loan Connector DealScan (consists of information about ~ 110 thousand of transactions)

Example of economic analysis: Intragroup loan

Step 3. Choice of the appropriate database of comparable transactions:

Company

nameCountry Deal Date

Deal

Status

Deal

Amount

(MUSD)

PurposeMaturity

(months)

Base

Rate

Annual

fees

(bps)

(Un)Secur

edIndustry

Moody's

Sr Debt

S&P Sr

Debt

Romashka Russia 26.06.2011 Completed 200 Corporate 60 LIBOR 6 Secured Wholesale Baa3 BBB-

Lilia Russia 13.06.2011 Completed 250 Real estate 46 LIBOR 15 Unsecured Construction Ba1 BB+

Rose Russia 07.07.2011 Completed 100 Takeover 36 LIBOR 25 Secured Oil and Gas A3 A-

Arsenal Russia 17.07.2011 Completed 150 Corporate 40 LIBOR 8 Secured Technology Baa2 BBB+

Avangard Russia 03.06.2011 Completed 300 Working capital 50 LIBOR 38 Secured Healthcare B2 BB-

Karlson Russia 05.07.2011 Completed 350 Debt repayments 35 LIBOR 15 Unsecured Retail Baa3 BBB-

Maroon Russia 30.06.2011 Completed 250 Corporate 24 LIBOR 13 Secured Oil and Gas B3 B-

Example of economic analysis: Intragroup loan

Step 4. Calculation of the market interval

Comparable transactions Amount of transactions - 7

Minimal value: 7 / 4 = 1.75 → 1 + 1 = 2 → min. value that indicates the number 2, – 8

Minimum value – 8 bps

Maximum value: 7 x 0.75 = 5.25 → 5 + 1 = 6 → max. value that indicates the number 6, – 25

Maximum value – 25 bps

Market range: 8 – 25 bps

Conclusion: the interest rate of LIBOR + 20 bps is within market interval

THANK YOU FOR YOUR ATTENTION!

Contact Information: Alexander Simonov

Mazars S.A. Alexander.Simonov@mazars.ru

Office: +7 495 792 5245 Mob.: +7 916 390 7899

The content of the presentation cannot be applied as legal counselling as this will always be subject to actual and specific knowledge of the client’s situation.