Transfer pricing

The Ministry of Finance has just published their proposed amendments of transfer pricing regulations under the Polish Deal. The goals behind the suggested amendments are, among others, to make it easier for taxpayers to meet their reporting obligations and simplify the local file.

Changes concerning transfer pricing in transactions with tax havens, effective as of 1 January 2021, will be challenging for taxpayers. Under the new regulations, there is an obligation to have verify whether transactions where the beneficial owner has its place of residence, registered office or management in a tax haven comply with the arm’s length principle (and it is unclear whether the legislator means the actual owner of our contractor or the cash flow generated as a result of a given transaction, as the regulations fail to specify this). What is more, taxpayers must provide economic justification for their transactions with tax havens.

The Organisation for Economic Co-operation and Development (hereinafter: OECD) has published the long-awaited Guidance on transfer pricing implications of the COVID-19 pandemic (hereinafter: Guidance). It includes comments and explanatory remarks that both taxpayers and tax administrations should take into account in evaluating the implementation of transfer pricing policies in the face of extraordinary economic conditions caused by the COVID-19 pandemic.

The Ministry of Finance has published draft tax explanations on transfer pricing regarding presumption and due diligence in transactions with tax haven entities. The draft explanations are now subject to tax consultation that will last until 20 April 2021. This consultation is open to all entities.

In today’s article we would like to give you some insight into transfer pricing adjustment regulated directly by the legislator in Article 11e of the Act of 15 February 1992 on Corporate Income Tax (hereinafter: CIT Act) and, respectively, Article 23q of the Act of 26 July 1991 on Personal Income Tax (hereinafter: PIT Act). We are also going to discuss the position of the tax authorities presented in relevant advance tax rulings that have been issued recently.

22 February 2018, draft Regulation of the Ministry of Finance extending deadlines for the  transfer pricing reporting, was published on the Government Legislation Center website. In accordance with the draft Regulation, taxpayers will have additional six months to fulfill the reporting requirements. In this Tax Alert we present you with the planned changes.

The tax authority, to apply the 50% punitive rate for the upward adjusted  profit between related entities, has only 3 years after the end of the calendar year when the tax liability arose. After that time, until the expiry of 5 years from the end of the calendar year when the tax liability reached its maturity, it may only apply the basic rate of 19%. Such conclusions can be drawn from the judgment of the Supreme Administrative Court of 13 October 2016, ref. No. II FSK 2288/14. 

The issue of changes in transfer pricing has been discussed for a long time now. The pompously announced revolution in transfer pricing has finally occurred – from the beginning of 2017, new regulations for determining the entities obliged to prepare tax documentation have been introduced along with a different than before method of qualifying the transactions that should be included in the transfer pricing documentation.

72% of internationally operating middle market businesses (defined as having revenues from $50m to $1bn) expect to pay more tax as a result of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan as uncertainty around how the rules will be implemented hits the boardroom.

Undoubtedly, management of each related entity has to answer a question of whether to prepare tax documentation or choose to rely on luck instead, and a chance of not being summoned by the tax office to submit it. Or, if you have already decided to prepare the documentation, when to do it – during the tax year or after it finishes? Currently, almost each and every income tax control requires submitting TP documentation. One of the most committed errors between 1 January 2013 and 1 July 2014, in the case of  reduction of tax liabilities exceeding PLN 1,000, was lack of TP documentation[1]. This year, tax documentation will also constitute one of tax control priorities (vide The National Action Plan of Tax Administration for 2015).