Transfer Pricing Draft Law

1. Transfer Pricing Draft Law Practical Implications and Initial Preparation Henrik Hansen, Senior Manager, E&Y TP

2. Transfer Pricing Draft Law • Draft law introduced in February, revised again in July 2007 • Overall purpose • Improve the Russian tax authorities ability to asses the arm’s length nature of taxpayers’ transfer pricing policies • Clarifying/widening the definition of controlled transactions and interdependent parties • Adding to the taxpayer’s “burden of proof” • Tax return reporting and TP documentation requirements • Abolishing an (arbitrary) 20% safe harbor and the concept of one market price only - replaced with a market price (profit) range • Timing expectations: • Submitted to the Russian government for consideration by the end of this year • New government and presidential election – any implications? • Potentially submitted to the lower house in early 2008 • Could be enacted during 2008 or as of 1 January 2009 • What can/should taxpayers do now to prepare themselves?

3. Controlled Transactions and Interdependent Parties • Draft Law • Related party transactions involving IP, financing, property rights and information are now also within scope • Nearly all third-party cross-border transactions – though excluded are: • Financial transactions • Most tangible goods - assumes the counter-party is located in a non-black listed jurisdiction • Widening the definition of interdependent parties, e.g., common board members • Taxpayer Initiatives: • Identify your controlled transactions which are in excess of RUB 1m and concluded with one party (or a number of the same parties) • assess the potential exposure arising • Identify your interdependent parties – though easier said than done • Not entirely clear how taxpayers or tax authorities would be able to identify all interdependent parties • Keep track of contractual counterparties • which are and which could potentially be considered interdependent?

4. Reporting Requirements • Draft Law: • Tax return reporting requirements include: • Controlled transactions • income received/costs incurred • Listing the jurisdictions in which the foreign counterparties are located • Information on prices used • Information on TP method applied and data sources • Taxpayer Initiatives: • Are IT systems capable of generating such data? • Breakdown of income/costs from each transaction? • Can overhead costs be segmented in a reliable way? • Identify “normal cost” and “shareholder related cost” • Prices applied in each transaction • Could be many smaller transactions with different prices under one supply agreement • Can we capture all of the transactions and prices? • And do we really have to? • Clarity regarding aggregation would be highly appreciated

5. TP Documentation • Draft Law: • Shifting burden of proof to the taxpayer • Taxpayer will have to document the arm’s length nature of his transfer pricing policies • To be provided within 10 days upon request • Effectively contemporaneous TP documentation requirements • Taxpayer Initiatives: • Initial sense check: • Is substance aligned with the form of my transactions? • Is there a fair alignment between substance and profit apportionment? • Possibly consider realigning business and TP-structure for future • Do we have other local, regional, global TP documentations which can be leveraged from and what local other supporting documents are available? • What additional work would have to be undertaken to be compliant with proposed Russian requirement?

6. Market Price Range and Data Sources • Draft Law: • Abolishing the arbitrary, but convenient 20% safe harbor range • Introducing a market price (profit) range instead • A statistically flawed approach to the range which depends heavily on the extreme market price (profit) observations • Range definition inconsistent with international practice – risk of double taxation • Widening the data sources available – but still very Russia centric; some sources are also not necessarily indicative of arm’s length pricing (e.g., customs data) • Taxpayer Initiatives: • Are we aware of any extreme price (profit) observations in our industry? • If yes, can establish arguments to reject their comparability? • If the Group has existing TP documentation, what data sources were used for the Benchmarking searches? • Could these be used in Russia, or would we have to undertake local studies?

7. Q & A