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. Last Updated: 07/27/2016

THE TAX ADVISER: 'Sales Below Cost' Rules No Longer in Tax Code




Dear Tax Adviser:


I have heard that if my company sell goods to independent third parties at a loss, I will still have to pay profit taxes. Can you explain?


Thankfully, this should no longer be true for Russian taxpayers who sell goods and services at a fair market value. As of Jan. 1, 1999, the Tax Code introduced transfer pricing legislation that replaced the antiquated "sales below cost" rules. The old rules were poorly written and gave the tax authorities the ability to redetermine the sales price of goods, including sales between independent parties, regardless of the commercial reasons for the transaction.


Under the old rules, if a company sold goods or services below "cost" and sales were made at less than what the tax authorities deemed market value (using various methods including statistical data) the sales price would be rdetermined, which cost the taxpayer additional Value Added Taxation, turnover and profits taxes. Many costs in addition to the actual cost of the goods were taken into account when determining if items were sold below "cost." Also possible commercial reasons for selling at a lower than market price, such as market penetration and inventory considerations, were never considered.


With the introduction of the Tax Code on Jan. 1, 1999, the old rules were replaced with a more sophisticated set of rules. The new rules, commonly known as "transfer pricing," significantly restrict the tax authorities ability to adjust the price of transactions and consider the commercial aspect of the transaction (i.e., marketing purposes, obsolescence).


The general rule included in Article 40 of the Tax Code is that the prices set by parties in a transaction will be respected and assumed to be in accordance with market prices unless proved otherwise. However, the tax authorities have the right to check the accuracy of prices in any of the following types of transactions: between related parties, barter transactions, foreign trade contracts, and if the price of goods varies by more than 20 percent in either direction from goods sold by the taxpayer in a short period of time.


Any one of these four situations can give rise to the tax service's interest in a particular transaction. However, the authorities would have the right to adjust the prices set by the parties only if the price set by the parties deviates from market prices by over 20 percent in either direction.


The new law is a significant improvement over the old rules and is a sign that tax legislation is going in the right direction in this country.


Glenn Geffner is national managing director of tax services at Deloitte & Touche in Moscow. Please fax any questions to: The Tax Adviser, Deloitte & Touche, 956-5001.