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Proposed changes in transfer pricing regulations

Transfer pricing regulations have been included in the package of proposed changes to tax law implementing the political programme known as the Polish Deal. Some of these changes respond to market expectations and deserve applause. Others will complicate taxpayers’ lives. Here we examine the proposed solutions.

From the taxpayers’ perspective, the most important changes concern expansion of the obligation to prepare group transfer pricing documentation, and subjecting failure to prepare such documentation to criminal and fiscal liability, with a threat of fines running into millions of zlotys.

The positives include a reduction of documentation obligations in selected cases, simplification of transfer pricing reporting, a slight extension of deadlines, and resolution of several technical problems that emerged in the course of application of the regulation in effect from 2019.

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 in a situation where the taxpayer holds a statement from the related party that it made the relevant adjustment, and when it has confirming accounting evidence. The requirement to confirm transfer pricing adjustments in the annual tax return would also be eliminated.

Safe harbour mechanism for financial transactions

  • Amendment to a contract

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 will eliminate the obligation to prepare 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.

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 insured amount will constitute the benchmark for insurance and reinsurance contracts.
  • In turn, the total value of contributions made to a partnership (not a legal person) 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 with 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.
  • No allocation key is used.
  • The reinvoiced cost is not 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.

  • Additional element of local documentation

In the case of articles of association of a partnership (not a legal person), articles of association of a joint venture, or other articles of association of a similar nature, the transfer pricing analysis will have to cover the adopted principles concerning the rights of the partners or parties to the contract to a share in the profits or assets and to participation in the losses.

  • 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.

The effect of these changes would be to extend fiscal penal liability to cover failure to comply with the obligation to attach group documentation to local transfer pricing documentation. This offence will be subject to a fine of up to 720 per diem units.

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 proposed changes would remove 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.

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 in a situation where 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

Considering that the removal of the provision concerning the aforementioned declaration would partially lift the burden of liability from the shoulders of the management board members, 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, and if the entity is managed by a body with multiple members, one or more persons authorised to represent the entity pursuant to the rules of representation.

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

Group documentation

More taxpayers would be required to prepare group documentation, as the income criterion would disappear from the regulation. Under the bill, the circumstances making it necessary to attach group documentation to the local transfer pricing documentation would be:

  • Consolidation of financial statements using the full or pro rata method, and
  • The obligation to prepare local transfer pricing documentation.

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 for financial transactions.

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 related parties that are not payers of PIT or CIT, namely partnerships that are not legal entities, 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