Adjustments of transfer prices have generated a lot of uncertainty among taxpayers for a long time, as evidenced by the large number of individual tax interpretations issued in this area. Due to the change in regulations, and because the right to make an adjustment is affected by numerous factors, taxpayers seek interpretations from the revenue administration even when the facts are not very complicated.
It often happens in intra-group transactions that over the course of the year, the transfer prices serving as the basis for calculating the fee of an associated entity turn out to be disproportionate, causing the margins of that entity as of the end of the year to depart from the typical margins achieved by comparable entities in transactions with non-associates.
Adjustment of transfer prices is made between associated entities in order to bring their margins into line with arm’s-length market standards, taking into consideration the functions they perform, the risks they incur, and the assets they have engaged.
New regulations governing conduct and recognition of transfer pricing adjustments have been in force in Poland since 1 January 2019, and apply to adjustments for controlled transactions carried out on or after that date.
As a rule, under Art. 11e of the Corporate Income Tax Act (or Art. 23q of the Personal Income Tax Act), the taxpayer may make an adjustment of transfer prices if all the following conditions are met:
- In the controlled transactions carried out by the taxpayer during the tax year, conditions were established which would have been established by unassociated entities.
- There was a change in material circumstances during the tax year affecting the established conditions, or the actually incurred costs or actually obtained revenues which were the basis for calculation of the transfer prices are known, and an adjustment to the transfer prices is necessary to ensure their compliance with the conditions that would have been established by unassociated entities.
- At the time it makes the adjustment, the taxpayer holds a statement from the associate that the associate has made an adjustment to the transfer prices in the same amount as the taxpayer.
- The associate referred to in point 3 has its residence, registered office or management in Poland or in a state or territory with which Poland has concluded a treaty on avoidance of double taxation, and there is a legal basis for exchange of tax information with that jurisdiction.
- The taxpayer confirms that it has made the adjustment of transfer prices in its annual tax return for the tax year affected by the adjustment.
The adjustment of transfer prices should be recognised “retroactively” by adjustment of the revenues or revenue-earning costs in the tax year which the adjustment concerns. A condition for recognising an adjustment reducing revenue or increasing revenue-earning costs, i.e. an adjustment leading to a reduction in net income, is fulfilment of all the conditions set forth in points 1–5 above. However, in the case of an adjustment increasing revenue or decreasing revenue-earning costs, i.e. when the adjustment increases the taxpayer’s net income, it is sufficient to meet the conditions set forth in points 1 and 2.
These rules for making adjustments to transfer prices under Art. 11e of the CIT Act were confirmed by an individual tax interpretation by the Director of the National Revenue Information System of 29 June 2020 (no. 0114-KDIP2-2.4010.82.2020.2.SJ/AS).
According to the facts stated in that interpretation, the dominant company, the central entity in a capital group, administered all business processes within the group, incurred significant risk related to key business functions, and concentrated and engaged the assets necessary to execute these functions. The dominant company supplied goods to a distribution company, which served as a limited-risk distributor, responsible for wholesale and retail distribution of goods. The distribution company did not bear significant risk and engaged only the basic assets necessary to conduct its distribution activity.
The individual interpretation held that if the operating margin actually achieved by the distribution company is higher or lower than the target operating margin, and an adjustment of the operating margin is not connected with any specific sales transaction or sales price (but should refer to the entire income from sales made by the company), it is justified to make an adjustment in the margins of the distribution company so that the actual operating profit in the given tax year corresponds with an arm’s-length market level. To that end, after fulfilling the formal criteria, the taxpayer may make such an adjustment based on Art. 11e of the CIT Act.
It should be borne in mind that adjustments to transfer prices concerning controlled transactions carried out before 1 January 2019 are subject to the prior rules for adjusting the margins of associated entities.
Wojciech Marszałkowski, adwokat, Mateusz Rowiński, Tax practice, Wardyński & Partners