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6 Aug, 2008 03:15

Finance Ministry comes up with draft transfer pricing law

After four years work, Russia’s finance ministry has finally come up with a draft law to control transfer pricing. The draft appeared just days after Prime Minister Putin accused metal producer Mechel of selling coal to its offshore arm at below-market pr

The finance ministry says transfer pricing is widely used by large corporations in Russia  – who move funds in or out of the country, by selling goods to their subsidiaries at above or below-market prices.

The ministry is proposing new regulations to make sure they don't avoid taxes. The ministry said new rules will help establish what is a market price and identify illegal transfer pricing. Ilya Trunin from the Taxation Department in the Finance Ministry explained.

We suggest this rather complicated approach. It's based on the analysis of maximum and minimum price that are observed on the market, and then by calculation of the possible range of market price, basing on the whole universe of prices.

The largest case of tax evasion using transfer pricing occurred in 2004 – it was one of the key allegations against the Yukos oil company. Experts say the fate of Yukos means public companies have kept well away from such schemes. They say the new law would be tough to implement. Because companies, let alone officials, struggle to define a market price for some goods. That makes it hard to prove a case of transfer pricing. Evgeny Nadorshin Chief economist at trust Bank believes it will be exceptionally difficult.

You cant always keep in mind all these circumstances, all these conditions, all the trends which may affect market prices at any moment in time. And thus I am pretty sure that it not possible to calculate a very good and unquestionable and always reliable market price for every moment of time , for every contract concluded by any company.

The problem is not unique to Russia. It is hard to establish a price for goods – from coal to electricity – which are not readily traded on exchanges. Experts say the tax service will find it much easier to allege transfer pricing, than to prove it.