OECD member countries are recommended to observe the Guidelines when applying transfer pricing at the national scale and taxpayers - when checking the correspondence of transfer pricing with the principle of the Уarm's lengthФ. Besides the act mentioned the OECD coordinated bodies have issued numerous reports concerning the issues of transfer pricing regulation for the purposes of taxation. Despite the fact that these documents are recommendatory they have gained nearly regulative nature due to their wide application48. This is the main recommendatory and methodical document in the field of taxation regulation of transfer pricing and are to some extent taken into account in the legislation and enforcement policy in various countries of the world, including those that are not OECD members49.
Thus the methods of transfer pricing adopted in the operational practice of the majority countries of the world are based on the principle of the prices determination Уat the arm's lengthФ, that is in the competitive environment. In general this principle means that that the price of the deal (operation) is the price that company B would pay to company A under market conditions of company B was an independent company not connected with company A at all. The application of the principle of the Уarm's lengthФ involves some difficulties. The critics of this approach indicate that such and approach would hardly have positive results in case the deal takes place between the filial enterprises of a multinational integrated company. The same opinion applies to the deals (operations) between the filial enterprises of a national integrated company (in Russia, for instance, vertically integrated oil companies). The critics hold that when the principle of the Уarm's lengthФ does not cover all specific features of the enterprisesТ operation especially in the field of technologies transfer both in the form of the intellectual property and in the form of know-how or other valuable assets of non-traditional form.
Still OECD and the taxation bodies in the majority of the countries continue to apply the principle Уat the arm's lengthФ partially because it corresponds well with the territorial principle of the definition of the national taxation jurisdictions. However in practice the foreign taxation bodies when conducting taxation checks widely apply the methods of profit redistribution (reappraisal), thus recognizing that both international and national corporations apply transfer pricing.
Thus, when the facts mentioned above are compared with the explanatory note accompanying the draft of the law, there are no doubts that the structure and the mechanism of the draft of the law are indeed based on the up-to-date international experience and the outline of the draft does not conflict it.
However some statements that are missing from the draft and others that are given there will complicate not only the application of these norms by taxpayers and taxation bodies but also their interpreting by courts in some cases. Let us note the main among them.
The draft of the law in question envisages two approaches to establish the interdependence:
- Уjuridical interdependenceФ, which is based on the direct listing of the persons that are interdependent and which does not require additional proving in the court, according to clause 2 article 105.1;
- Уreal interdependenceФ, which is established at the court, according to clause 3 article 105.1.
Taking into account the fact that there is the second approach to establish the interdependence, the moment of the court recognizing the persons interdependent should be additionally defined by the law.
The question is when the court recognizes the persons as interdependent: before the taxation bodies apply the articles of the new Tax Code on charging additional taxes on the controlled deal or after the taxation body adopted the decision on charging additional taxes on the controlled deal during the court adjudication. In case the court does not recognize the persons as interdependent there are additional unjustified costs evolving both for the taxpayer and the budget.
Clause 2 of article 105.8 contains a number of vaguely defined notions, such as Уa considerable number of deals meeting the conditions envisaged by clause 1 article 105.5 of the Code given and sufficient information on these dealsФ, Уto draw the most reasonable conclusion on the correspondence or non-correspondence of the deal price with market pricesФ. These expressions Уa considerable numberФ, Уsufficient informationФ, Уmost reasonableФ can result in the variant readings of the article of the Tax Code mentioned by the taxpayers and the taxation bodies.
In accordance with clause 4 of the article given the results of the deal can be defined basing on the market price of the object of the deal, which is obtained as a result of the independent estimation in accordance with the legislation of the Russian Federation and foreign countries. Perhaps here the information that is available to the taxation bodies in the context of the information exchange between the taxation bodies, in which case one should state this more specifically or define the cases of addressing to the information of the foreign countries when such a necessity arises not in the context of information exchange between the taxation bodies.
The draft of the law enhances the list of the methods used for the definition of the correspondence of the deal price with the market prices and specifies at the same time the methods for the definition of the market price already used according to article 40 of the Tax Code of the Russian Federation. For instance, there are methods of the reprocessing product (secondary product), comparable profitability and profit redistribution added. The scheme of the method of profit redistribution suggested by the draft of the law requires specification. The method of profit redistribution, as well as the method of the comparable profitability (article 105.14) is the method applied in the context of the USA Treasury regulations concerning transfer pricing and OECD Guidelines on transfer pricing. The statements of the method of comparative profitability in the article mentioned above reflect the ideology of this method as applied by the OECD and the USA concerning the fact that the indices used when applying this method are limited only by those that are directly or indirectly related to the particular deal. However the regulations of the method of profit redistribution do not reflect the ideology of this method as applied by the OECD and the USA concerning the fact that in the USA the aggregated operational incomes and losses are defined by the narrowest sphere of the commercial activity of the taxpayer controlled, on which there is information available and to which the controlled deals belong (corresponding field of the commercial activity), whereas in Russia there is no such limitation. Thus, there is no method uniformity and the symmetry in approaches of new methods. Besides, clause 6 states that when applying the method of profit distribution the risks УmayФ be taken into account. The risks analysis is the basis for the application of the method and, consequently, risks not just УmayФ but УmustФ be taken into account.
The correction in the articles devoted to the preparation and submission of the documents grounding the application of prices for the taxation purposes are also to be introduced. In order to ground the correspondence of prices used in the controlled deals, mentioned in clause 1 article 105.16, with the market prices the taxpayer composes some documents in the form he prefers. Clause 1 of article 105.16, for instance, includes the deals between the interdependent persons with the limitation mentioned that thee statements of the clause given are applied only in cases when the sum of incomes and losses from all the controlled deals made within a calendar year by one person (several same persons who are the sides of the controlled deal) exceeds RUR 1000 mln. Taking into account the comments given to article 105.1 on the interdependence one can notice that in practice there might be a situation when the taxpayer did not suppose that his activity be the subject of these articles and he was to compose any documents since he did not regard himself to be an interdependent person or an interdependent person, whose sum of incomes and losses from all the controlled deals made within a calendar year with one person exceeds RUR 1000 mln.
It is desirable to introduce amendments to the clause devoted to the calculation and payment, retention and transfer of the taxes when the prices used in the deals deviate from the regulated or market price (105.20). The taxpayers (tax agents) have a right to compute and pay the tax sums, calculated on the basis of the estimation of the results of the deals using, correspondingly, regulated prices or market prices, as well as to pay the penalty fees when the deviation of the price results in the underestimation of the taxation sums. There is also a specification concerning the deviation from the regulated or market prices, Уincluding when it is above the maximum value (is below the minimum value)of the range of the market prices, defined in concordance with article 105.6 of the present Code and on the estimation of the results of deals, using, correspondingly, prices Уof the minimum (maximum) value of the range of the market pricesФ. Thus, the taxpayers (tax agents) have a right to use all the methods for the price definition, envisaged by the Tax Code independently. In this case it would be reasonable to specify this possibility in an explicit form.
Besides, in accordance with clause 2 article 4 of the draft of the law, Chapter 146 part one of the Tax Code of the Russian Federation, which is intended to substitute articles 20 and 40 of the Tax Code of the Russian Federation that are currently in effect as well as clause 12 article 2 come into effect on January 1, 2011. That is the introduction of the transfer pricing agreements for the purposes of taxation suggested to be introduced by the draft of the law is put off for one more year. In practice this may result in first such agreements appearing only in 2013. If one calculates the periods for consideration of the taxpayer application, one will get more than one year: 1 year + 3 months + 5 days is the maximum period for the papers consideration.
On the whole, it can be noted that the draft of the law does have the structure that corresponds to the similar acts of the foreign countries and is one more step on the way of the improvement of the Russian taxation system.
Carry trading strategy and its impact in the context of financial crisis А. Аbramov This article discusses the specifics of carry trading strategy, actively pursued in 2003-2007 by commercial banks and foreign hedge funds. Particular attention is paid to its implications in the context of the financial crisis of 2008.
A key element of economic policy of Russia in the 2000-s was the transfer of surplus cash savings as a result of favorable foreign trade situation to the sovereign extrabudgetary funds (the Stabilization Fund, transformed into the National Welfare Fund and Reserve Fund, as well as Gold Reserve of the Bank of Russia). The shortage of assets, formed herewith, was covered by the companies and banks by external borrowing. Figure 1 shows the ratio between the national gold reserves and the volume of external debt. The amounts of international gold and foreign currency reserves and external debts of the business are proportionate to each other. In such situation, the difficulties in repaying the external debt by companies and banks, the government will be forced to cover them from gold and foreign currency reserves, as otherwise, the strategically important companies and industries will become the property of foreign investors for symbolic prices through the margin call50 mechanism.
Not surprisingly, that immediately after large downfalls in the securities of the Russian companies in September-October 2008, the government has quickly allocated from Vnesheconombank reserves USD 50 billion to finance the redemption of external Russian companies and banksТ debts. According to the Bank of Russia, in the IV-th quarter of 2008, the Russian companies had to repay external creditors USD 47.5 billion, what is approximately the volume of funds, allocated to Vnesheconom Bank.
According to the Bank of Russia estimates, in 2009, the Russian companies and banks will have to repay USD 116 billion of foreign debts. This means that in the medium term the external debt of companies will getting educed together with the government gold and foreign currency reserves.
The chance to involve cheap external monetary funds for a long term made it possible for the financial intermediaries of Russia to benefit from high-yield speculative transactions with the minimal equity, rather than to care about the accumulation of their own capital. Carry trading speculative strategy is the most simple way to involve investments to business, ensuring not only the receipt of investments, but also a high profit of brokers51. The main point of it is simple: to attract money by borrowing currency of the countries, where the interest rates are low (credit currency), for further investment in financial instruments of the countries, where the interest rates in national currency are relatively high (the currency of investment). According to the estimates of the Bank for International Settlements (BIS), the most popular funding currencies were the Japanese yen, Swiss franc and U.S.
The majority of the foreign credits were taken under the security of large blocks of companies and banksТ shares. When the value of security gets reduced, the bank can demand from the debtor to add some assets to the pledge and in case of failure to do so, to recover the debt by the debt assets acquisition by the bank through debit without further authorisation.
Galati G., Heath A., McGuire P. Evidence of carry trade activity. BIS Quarterly Review, September 2007, pp.28-29.
dollar, while the investment currencies were those of Australia, New Zealand and countries with emerging economies52.
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