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Transfer pricing: The next amendment

A revised bill to amend tax regulations as part of the “Polish Deal” has been submitted to the parliament. How do the proposals involving transfer pricing look now?

We wrote about the bill affecting transfer pricing in August. Now we present an update on the proposal as of September 2021.

Transfer pricing adjustments

The catalogue of criteria to be met when making transfer pricing adjustments is to be amended:

  • Adjustments consisting in a reduction of income would be possible both when the taxpayer holds a statement from the related party that it made the relevant adjustment, and when it has confirming accounting evidence.
  • To make an adjustment, it would not be necessary for the affiliate to be located in a country with which Poland has concluded a treaty on avoidance of double taxation. It would suffice that there was a legal basis for exchange of tax information.
  • The requirement to confirm transfer pricing adjustments in the annual tax return would also be eliminated.

Safe harbour mechanism

  • Amendment to a loan agreement

The proposed regulations add a rule that any change to a loan (or mortgage or bond) agreement regarding the interest rate will require the interest rate to be updated so that it is consistent with the current value determined based on a ministerial announcement.

  • Exemption from documentation obligation

Under the proposed solution, the use of the safe harbour for financial transactions or for low value-adding services will eliminate the obligation to prepare local transfer pricing documentation.

However, the proposed regulations provide that the recipient of low value-adding services must hold a calculation with a description of the transaction, including an analysis of the function, risks and assets, i.e. the principal portion of the local transfer pricing documentation.

Local transfer pricing documentation

The deadline for preparing local transfer pricing documentation is to be extended to the end of the tenth month following the end of the tax year.

The documentation is to be prepared in electronic form.

Value of transactions

  • Supplementing the rules for determining the value of transactions

The rules for determining the value of a controlled transaction are to be supplemented by further items:

  • The value of the capital will serve as a benchmark for deposits.
  • The total value of contributions made to a partnership (without legal personality) will constitute the point of reference in the case of the articles of association.
  • Value of transactions and VAT

The issue of taking VAT into account when determining the value of a transaction is also to be clarified. Previously, the rules referred to the value of the transaction “less VAT.”

An exception is to be added, that the value of transactions will not be reduced by VAT that is not input tax, or by input VAT in the portion in which the difference in VAT cannot be reduced or refunded.

Exemption from the documentation obligation

The exemption from the obligation to prepare local transfer pricing documentation would apply to additional types of transactions:

  • Transactions between Polish establishments of foreign related parties with their registered office in the EU or EEA
  • Transactions between a Polish establishment of a foreign entity with its registered office in the EU or EEA and a related party with its registered office in Poland.

A prerequisite is that the income or deductible costs in such transactions are assigned to the foreign establishment, and none of the related entities enjoys exemptions concerning such costs and income referred to in Art. 6 (subjective exemptions) or Art. 17(1)(34) and (34a) (zone exemptions) and has not incurred a tax loss.

Moreover, an exemption from the documentation obligation would apply to transactions covered by an advance pricing agreement, an investment agreement or a tax agreement, as well as transactions consisting in reinvoicing of costs. Reinvoicing transactions would have to meet the following criteria:

  • Reinvoicing is not associated with an increase in added value.
  • Reinvoicing is done without a markup or margin.
  • The reinvoiced cost is not directly related to another controlled transaction.
  • Settlement occurs immediately upon payment to an unrelated party.

Transactions with entities located in tax havens would not benefit from this exemption.

If the reinvoicing is done using an allocation key, the allocation and the settlements would need to be documented under rules similar to those for low value-adding services.

  • Convenience for small taxpayers and partial rationalisation of the tax-haven regulations

The taxpayer would not have to prepare a comparative or compliance analysis:

  • For a transaction between related parties that are micro or small enterprises within the meaning of the Business Law
  • For a transaction other than controlled transactions with an entity located in a tax haven or an entity transacting with an entity located in a tax haven.

These provisions are to apply to transfer pricing documentation prepared for a tax year beginning after 31 December 2020.

Criminal provisions

The provisions of the Fiscal Penal Code are also to be amended.

Failure to comply with the obligation to attach group documentation to local transfer pricing documentation would become a criminal offence, subject to a fine of up to 720 per diem units (about EUR 6 million).

Otherwise, the amendments to the code appear to be aimed at adapting to the changes in other provisions.

Directors’ declaration and transfer pricing information

  • Changes in the scope of declarations

The provision obliging the head of the entity to submit a statement on the preparation of transfer pricing documentation and the arm’s-length nature of controlled transactions would be repealed.

However, this does not mean that the taxpayers’ obligations would be reduced. A similar statement would be integrated into the TPR information, indicating that the local transfer pricing documentation has been prepared in accordance with the actual state and that the transfer prices covered by this documentation are determined on terms that unrelated parties would determine between themselves.

  • Addressing the issue of gratuitous benefits

At the same time, the problem of submitting declarations of transactions at arm’s length in the case of gratuitous benefits is to be resolved. Doubts were raised whether such a declaration could be submitted if a benefit was received without consideration, and recognised by the recipient as income. The proposed regulations confirm that it will be possible to submit a declaration in this situation.

  • Deadline

The deadline for filing the TPR form is to be extended to the end of the eleventh month after the end of the tax year.

  • Competent authority

The TPR form is to be submitted to the head of the tax office and not to the head of the National Revenue Administration.

  • The right to sign

Removal of the provision concerning the aforementioned declaration would partially lift the burden of liability from the shoulders of the management board members. Thus the bill would shift the responsibility for submitting the TPR information to the management board members of limited-liability companies.

The transfer pricing information would be signed by:

  • A natural person, when the related entity is a natural person
  • A person authorised by a foreign business to represent it at the branch, when the related party is a foreign business with a branch operating in Poland
  • The head of the entity within the meaning of Art. 3(1)(6) of the Accounting Act, or if the entity is managed by a body with multiple members, the designated member of that body.

Agents, with the exception of adwokaci, attorneys-at-law, tax advisers and chartered accountants, would not be able to sign the transfer pricing information.

The bill also indicates that designation of a person to sign transfer pricing information would not release other members of the body from liability for failure to submit the information.

Here it should be asked whether designation of a person to sign the transfer pricing information means that this person would be the only one responsible for the correctness of the information, while the other members of the body would be liable only for failure to submit the information.

Other changes

An investment agreement or tax agreement would provide protection similar to an advance pricing agreement. The tax authority would not be able to determine the tax liability (or amount of loss) to the extent that the income (or loss) is determined in accordance with a relevant agreement.

The definition of related parties would be expanded by indicating that related parties include a limited partnership or a joint-stock limited partnership and its general partner (irrespective of the size of the share), as well as a general partnership (spółka jawna) that is a payer of corporate income tax and its partners.

Additionally, according to the bill, exerting significant influence would also include directly or indirectly holding at least 25% of shares or rights to share in losses or an expectation thereof.

The deadline for a taxpayer to submit local transfer pricing documentation at the request of the tax authority would be extended from 7 to 14 days.

In a situation where the taxpayer is generally not required to prepare local documentation but the authority requests the taxpayer to prepare and submit such documentation, a 30-day time limit would apply. It would also apply to situations where the taxpayer is unlikely to meet the prerequisites under the safe harbour provisions.

As a rule, the amendment would change the reference period in transfer pricing regulations from the financial year to the tax year. However, in case of partnerships that are not legal entities, as well as companies included in a tax capital group, it should be considered that if the regulations refer to a tax year, in their case it means the financial year.

Wojciech Marszałkowski, adwokat, Mateusz Rowiński, Tax practice, Wardyński & Partners