1. Korean Embassy Transfer Pricing Seminar TRANSFER PRICING SERVICES 4 March 2011

2. 1 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Agenda Current Russian Transfer Pricing Rules Expected New Transfer Pricing Law in Russia Recent Court Practice Your KPMG Key Contacts in Russia

3. 2 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Current Russian Transfer Pricing Rules TP regulations exist since its inception in January 1, 1999 but not well developed Tax Authorities control prices in transactions: –between related parties; -cross-border transactions; -barter transactions; and -transactions where prices fluctuate by more than 20% either side from the market level within a short period of time Formally there are no documentation requirements (BUT can be useful in case of dispute) No binding rulings or provisions exist re Advance Pricing Agreements (APAs) The burden of proof lies with the Tax Authorities

4. 3 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Expected New Transfer Pricing Law in Russia TP Draft Law passed the first reading BUT, the date when it is expected to come into force is unknown TP rules will become more detailed and close to international practice Tax authorities will control prices in related party transactions: a)within Russia: –material related party transactions (> 1 bln RUR in a calendar year) plus –all related party transactions if counterparty benefits from favorable tax regimes or pays MET b)all cross-border related transactions Tax authorities will control prices in unrelated cross-border transactions only if: -transactions are with commodities; or -counterparty is located in a tax haven jurisdiction TP documentation becomes compulsory and burden of proof lies with the taxpayer APAs will be available only for large taxpayers

5. 4 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Court Practice We would like to share with you recent court practice in the Russian transfer pricing law: Case 1 : Bloomberg case (use of foreign databases for benchmarking searches) Case 2:Mechel case (more than 20% deviation of domestic prices from export prices) Case 3:Agrotorg case (deductibility of royalties)

6. 5 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. I. Bloomberg case Facts Taxable Profit of PE for 2006 & 2007 FY was calculated and allocated to PE as it was a separate legal entity comparing it to European companies performing similar functions Search of comparable companies was made in Amadeus database The search was conducted for the years preceding the years under tax review and did not include years of assessment Bloomberg LLP (PE in Russia) 3 rd party customers (Russia) Issues No evidence to support the accuracy of the financial information contained in the Amadeus database Search was limited to European comparable companies only Tested period did not include the years under tax review Court’s decision Ruled in favor of the Russian Tax Authorities Access to computer programs (i.e. electronic financial databases) (Decision of the Federal Arbitration Court of Moscow Region No A40-94391/10-142-134 of 17 December 2010 )

7. 6 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. II. Mechel Case Facts Taxpayer was involved in domestic sales of ferrous ore concentrate to “Mechel Trading House” LLC and export sales to “Mechel Trading AG” Taxpayer (Russia) Mechel Trading House LLC Issues export prices of the ferrous ore concentrate were lower by more than 20% from domestic prices it was not proved that domestic prices for ore concentrate were influenced by related party relationship and thus, could be used to test the arm’s length nature of export prices Court’s decision Ruled in favor of the Russian Tax Authorities Mechel Trading AG Germany Sale of ferrous ore concentrate Russia Sale of ferrous ore concentrate $X 1 $X 1 *(>1,2) Transfer Pricing Law Article 40 of the Russian Tax Code gives right to the Tax Authorities to review prices in controlled transactions (i.e. transactions where prices deviate > 20% from the market value) (Resolution of the Federal Arbitration Court of Moscow Region No KA-A40/14051-10 of 6 December 2010)

8. 7 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. III. Agrotorg Case Facts Taxpayer was found to reduce its taxable profit by deducting royalty payments for the use of trademarks under licensing agreement between the taxpayer and “Spik Global Limited” Issues Expenses were not properly documented and economically justified could not be deducted by the taxpayer Spik Global Limited (Cyprus) OOO “Agrotorg” (taxpayer) Interesting to note Although, the level of royalty payments was not an issue in this case, the Court accepted as documentary evidence materials prepared by one of the BIG 4 consulting firm, which justified the level of royalty payments Court’s decision Court ruled in favor of the taxpayer Royalty payments for the use of Trademarks (Decision of the Arbitration Court of St. Petersburg and Leningrad Region No A56-22761/2009 of 16 June 2009)

9. 8 © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Your KPMG Key Contacts in Russia Alina Soloviova Partner Tax Department of KPMG in Russia +7 (495) 937 4420 asoloviova@kpmg.ru www.kpmg.ru Alexander Kruglov Manager Tax Department of KPMG in Russia +7 (495) 937 4444 AKruglov@kpmg.ru www.kpmg.ru

10. Thank you

11. © 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”).