Transfer pricing: a new development in determining the aggregate threshold of controlled transactions

Pepeliaev Group advises that the Russian Finance Ministry, in its Letter No.  03-01-03/18-31 dated 14 March 2012, clarified the procedure for determining amounts of income under so-called ‘fanned out’ transactions that a taxpayer undertakes with related parties.

The main conclusion that the Finance Ministry sets out in the letter in question is that to determine the aggregate control threshold, all income is added together under the transactions a taxpayer undertakes over a calendar year with all related parties (save for transactions provided for by articles 105.14(1)(2) and 105.14(1)(3) of the Tax Code.

Pepeliaev Group comments

Implementing such an approach in practice will mean for taxpayers that virtually all transactions between related parties will be subject to tax control. Effectively, this cancels out the idea of a materiality threshold for determining controlled transactions, as set out in the legislation.

We believe that the position put forward by the Finance Ministry in this Letter does not correspond to a literal interpretation of the law.

It is articles 105.14 (2) and (3) that stipulate a list of controlled transactions in relation to which a set control threshold is calculated (for example, RUB 3 billion), and a group of related parties transactions between whom are added together. In interpreting these, there is only one possible conclusion: that income is added only in relation to transactions to which the parties are the same related parties, and not all related parties that undertake transactions with the taxpayer.

The rule in article 105.14(9) of the Tax Code, to which the Finance Ministry makes reference in its Letter, may not be applied to expand the list of controlled transactions since it is intended solely for determining the time at which income is recognised in the relevant period. It is not intended for determining the range of persons in transactions between whom income needs to be added together. The phrase “under such transactions with one person (related parties)” should be interpreted as legislators making provision for instances when multi-party transactions are undertaken (a possibility that article 154(1) of the Russian Civil Code provides for).

How we can help

The professionals in Pepeliaev Group’s tax practice will help you to put together the fullest and most comprehensive legal position possible to justify why a taxpayer with a whole range of transactions with related parties should not have an obligation to add together income from these transactions for tax control purposes.

For further information, please contact:

in Moscow – Valentina Akimova, Partner, at: +7 (495) 967-0007 or by e-mail

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 640-60-10 or by e-mail