Calculation Method for Transfer Pricing in Kazakhstan

Calculation Method for Transfer Pricing in Kazakhstan

This method has been based on available methodological base for the control of transfer pricing and is designed to calculate and minimise the risks associated with transfer pricing.

The volume of adjustable income is calculated by multiplying the physical volume of goods in kind by the deviation of the price per a unit of goods from its market price.

The standard formula for calculation of the deviation of actual price from a market price for goods, works, and services in international business transactions is as follows:

S = Pr  - (Ps+D)

where:

S – the deviation of an actual price from a market price per a unit of goods, works, and services;

P_r – market price;

P_s – transaction price;

D – differential (expenses incurred by your counterparty).

The market price (P_r) means the following:

1) when applying comparable uncontrolled price method – a market price from information sources to for identical or, if such are unavailable – similar, goods. If the official source of information gives the price for goods with other physical characteristics or other quality rather than for the goods in question, it is required to make the appropriate adjustments based on generally accepted formulas or discounts/allowances.

In the absence of market prices from the official sources of information they use weighted average prices for identical (similar) goods, works and services exported/imported from a country based on the data from customs declarations.

2) when applying 'cost plus' method – a market price of goods (works, services) to be determined as the total supplier’s costs for transferred goods (services), costs associated with the sale thereof, and markups. Expenditures must be documented on the basis of objective and quantifiable data, markup must provide the current average rate of return established for a given activity.

3) when applying resale price method - a market price of goods (works, services) to be determined as the difference between the price, at which such goods (works, services) were resold by a buyer, and documented costs (expenses) incurred by the buyer when reselling (without regard to the price, at which this buyer purchased the goods (works, services) from a seller, as well as its markup. A markup is determined so to ensure the average rate of return established for a given activity.

The comparable price of goods (Ps) applies to bring the actual price of sale of goods to comparable economic circumstances considering all the markups and discounts for quality differences between goods (works, services) quoted on the market and goods (works, services) sold by a company.

Ps = Pf +(-) Id

where:

P_f – actual price of sale;

I_d  - discount (markup) for quality, quantity (volume) of supplied goods, etc.;

The differential (D) represents the total of transportation costs and other costs associated with sale of goods (works, services). For easy use it is divided into two types:

D_с – fixed costs (costs that are permanent and relatively independent of the volume of sales of goods, works and services);

D_v – variable costs (costs that are impermanent and dependent on the volume of sales of goods, works and services).

D = Dс + Dv

 

The costs, for instance, may compose of the following components:

Fixed Costs (Dс)	$/tonnes
Pipeline transportation	Pt
Rail way transportation	RW
Transhipment at a port	T
Customs and station duties	CP
Freight (depending on delivery terms)	F
Total	Pt+RW+T+CP+F
Variable Costs (Dv)	%
Credit Facility	K
Insurance	I
Commission fee of an intermediary (trader)	Cm
Losses	L
Total	K+I+Cm+L

Variable costs are usually expressed as a percentage of either a contract value, or a contract value taking into account the additional fixed costs, depending on delivery terms in each individual case.

When determining the differential and bringing the actual selling price to comparable economic conditions, tax authorities may take into account the following documented components:

1) rail way transportation (transportation rates per unit of goods, insurance of delivered goods, transportation distance, duration of transportation, variable discounts, type of rail way transport (covered or open wagons, tank, etc.);

2) bearing capacity and carrying load of transport units (costs of loading (unloading) per a unit of a car or goods);

3) transhipment at a port (costs of loading (unloading) per a unit of goods, cost of weighting per a unit of goods);

4) sea freight (distance delivery, discounts on volume of transported goods, insurance of the delivered goods, duration of the freight, freight terms);

5) demurrage (fee to ship-owner for demurrage in excess of the period established by the freight contract (warehousing, storage rate per a unit of goods and days, terms of storage);

6) discounts or markups for the quality of goods (a document confirming the amount of discount or markup);

7) insurance of goods (rate, terms and conditions of the insurance, goods insurance contract, recognised sources of information confirming the acceptability of insurance rates);

8) losses in the course of transportation (costs that arise when transporting goods from one transport to another, as well as in case of evaporation during the goods transportation;

9) commission fee of a trader, agent and freight forwarder;

10) pre-export credit facility;

11) conditions and terms of obligations performance, the type of prices applied (futures - the performance of obligations during the future and a long period, spot - on the date of the contract or the date of shipment);

12) certificate of quality or other documents confirming the processing of goods, the cost of processing per a unit of goods, terms of the goods processing;

13) other costs per a unit of goods (works, services), allocated in accordance with the laws of the Republic of Kazakhstan for deductions or conditions affecting the deviation in the control of transfer pricing.

Some cost items may be included in the sale price of goods, works and services, depending on supply conditions specified in the contracts. In this case, the calculation of the differential does not consider costs that are included in the price of goods, works and services up to a certain destination point.

For Instance, you are selling oil under FOB Primorsk Regulations and the deviation between a transaction price and a market price is calculated as follows.

To determine a market price, the world oil quotations of URAL (RCMB) quality less the differential (discount) are used.

According to the established practice of the control over transfer pricing when selling oil under the FOB Primorsk Regulations, the tax authorities take into account the following components of the differential and sizes thereof:

• freight - according to the information of the Dirty Tanker Freight, the Platt's;
• quality discount – considers the characteristics of oil and is calculated as follows:

(32-API)*0.03+(Sulfur content-1.25)*0.5

• losses - are no more than 0.5% of the cost of soled crude oil;
• independent inspection - is 0.01 US Dollars per barrel;
• insurance - is no more than 0.15% of the cost of soled crude oil;
• demurrage - is considered only in case of providing the primary document that this article was collected from and oil Purchaser;
• financial costs - are considered only in case of provision of primary documents that a Purchaser incurred additional financial costs, including loans.

Best Regards,

Transfer Pricing Department

Tel.: +7 (727) 2445-777
Fax: +7 (727) 2445-776
info@gratanet.com
amendybayev@gratanet.com