Since progressive and modern transfer pricing rules have been introduced to the legislation, replacing Article 40 of the RF Tax Code, many tax disputes over a price have come down to ascertaining whether the transaction price corresponds to the market value determined by an appraiser.

It is precisely appraisers' reports that became the key evidence that a price is at a arm's length level in the court practice of the first five years of Section V.1 of the RF Tax Code being in effect, even though:

  • Lawmakers clearly strove to decrease the appraiser's role in determining the price for tax purposes and put them last in the hierarchy of methods of determining a market price for tax purposes, limited the sphere of application to only one-off transactions and only in cases where transfer pricing methods cannot be used (Clause 9 of Article 105.7 of the RF Tax Code).
  • Appraisal techniques rely not only on facts, but also on assumptions and are to a large degree subjective, so the market appraisal result is a priori relative and approximate, which is recognized by the higher courts.

The Moscow Commercial Court's decision of 20 December 2016 in the Kazanorgsintez case is the crown in the "battle of appraisers" in court practice and an example of strong attention to detail in analyzing an appraiser's report to determine the market price for tax purposes. The decision thoroughly states the methodological, mathematical and factual defects of the report by an appraiser hired by the opponent that were used in the report prepared by order of the adverse party.

We note here in particular two leading categories of transactions:

  • In terms of the number of price disputes resolved on the basis of an appraiser's report, real estate sale purchase and lease agreements
    The emphasis in this category of disputes is more on procedural aspects, such as the party submitting the appraiser's report at all ( other evidence may be deemed inadmissible); whether the appraiser is hired before or after transactions; when the taxpayer being audited or its counterparty hires the appraiser and the essential question is whether the comparables are appropriate.
  • In terms of depth of analysis reflected in the judicial act, the share purchase agreement What draws our attention to this category of cases is the scale of the discrepancies between the tax authority's and taxpayer's appraisal ( by up to 6.5 billion times), and the varied approaches to appraising a business. The increased attention to detail in such disputes sometimes results in attempts to declare as a company's related parties a group of minority shareholders holding in aggregate  0.0014% of its shares; a person who played in a mini-soccer tournament organized by the company's trade union, etc.

Also, appraisers' reports are often used in practice to value intangible assets, but such cases are more rarely  found in court practice. It is likely that as the approaches to valuing intangible assets, including assets that are difficult to value, improve at the OECD level, the number of such disputes will grow and the quality of determining consistency of the price of an intangible asset to a royalty amount will improve.

Right now it makes sense to work out in detail the substantiation of the position put forward in the appraiser's reports in order to be ready to explain each methodological or mathematical action (adjustment) that was taken or not taken, relying on the facts, and not limit oneself to arguments such as "he's an artist and that's how he sees it."

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