Junior Tax Consultant
The revolutionary draft amendment of CIT and PIT Acts has recently been published amidst plenty of controversy, in particular about the CIT taxation of limited partnerships. This is one out of many changes suggested by the legislator and discussed in our Tax Alert. Important amendments that are supposed to enter into force in the beginning of 2021 include transfer pricing regulations, and that is what we are going to focus on in this article.
Transactions with entities from tax havens
Major changes in transfer pricing provided for in the Draft involve transactions with entities from tax havens. In particular, they consist in the following:
- the scope of transactions to be verified with the arm’s length principle shall be extended to include:
- transactions where a Polish taxpayer or a company that is not a legal person receives a payment from an entity from a country or a territory of harmful tax competition;
- controlled transactions or non-controlled transactions, if the beneficial owner has its tax residency in a country considered a tax haven, with a reference being made to the statutory definition of a beneficial owner. The undefined term of making “direct or indirect” payments of receivables to a tax haven entity was abandoned to eliminate interpretation ambiguities, in particular about the understanding of the phrase “indirectly”. At the same time, a presumption has been introduced that the beneficial owner has its place of residence, seat or management board in a tax haven in the case where a contractor of the taxpayer or a company that is not a legal person concludes transactions with an entity that is either seated or has a management board in a tax haven in the fiscal year. The taxpayer or the company that is not a legal person shall determine these circumstances with due diligence;
- there shall be a uniform documentation threshold of PLN 100 thousand for controlled and non-controlled tax haven transactions;
- the scope of estimating transaction value shall be extended to include in particular non-controlled transactions, if the beneficial owner has its tax residency in a tax haven, with a reference being made to the statutory definition of a beneficial owner;
- the scope of elements required in a local file of transactions with tax haven entities shall be extended to include, among others, economic justification for concluding a transaction with this entity, including a benefit test, i.e. a description of expected economic benefits, including tax benefits.
What is particularly disputable is the obligation to verify the beneficial owner is the case where the contractor of the taxpayer or a company that is not a legal person concludes transactions with an entity that is either seated or has its management board in a tax haven. In many cases, getting any information about our contractors’ contractors will be impossible, or at least very difficult. However, this is not the first time the legislator imposes obligations the taxpayers have limited tools to perform, with no coercive measures in place for taxpayers to rely on in respect of their contractors (see: verification of the beneficial owner for withholding tax).
Tax strategy reporting
Tax capital groups and taxpayers whose revenues exceeded the equivalent of EUR 50 million in the previous year shall be obliged to prepare their tax strategy report and make it available to the public, with transfer pricing information included, i.e. information on:
- transactions with related entities within the meaning of Article 11a par. 1 item 4 of the CIT Act, whose value exceeds 5% of the balance sheet total of assets;
- any restructuring activities, either planned or undertaken by the taxpayer, that may affect the amount of tax liabilities of either the taxpayer or related entities within the meaning of Article 11a par. 1 item 4 of the CIT Act;
- any tax settlements made by the taxpayers in countries with harmful tax competition.
At the same time, the legislator provides that any trade, industrial, professional or production process secrets shall not be disclosed, which seems a rational exemption; however, it will produce many practical interpretation problems.
The taxpayer shall publish the tax strategy report on its website by the end of the ninth month following the expiry of the deadline for submitting the annual tax return.
Any taxpayer who fails to meet the aforementioned obligation shall be subject to a fine in the amount of up to PLN 1 million.
As you can see, the legislator keeps extending the catalogue of fines in tax regulations, as imposing them seems easier and more certain for ensuring budget revenues than lengthy tax offence proceedings (where you have to prove guilt and the intentional nature of the offence).
Changes related to COVID-19
The explanatory memorandum to the Draft reads that the goal behind the introduced amendments is also to reduce the bureaucratic and administrative burden on entrepreneurs in the field of transfer pricing in the period of an epidemic emergency or a state of epidemic due to COVID-19. The easing of tax obligations in the particularly difficult time of recovery from the COVID-19 crisis shall include:
- an exemption from the taxpayer’s obligation to have a related party’s declaration of transfer pricing adjustment (this exemption shall cover only those adjustments that are made in the time of the COVID-19 crisis);
- a possible exemption from the obligation to prepare a local file for transfer pricing for domestic transactions (Article 11n item 1 of the CIT Act) by entities whose revenues in the tax year affected by the COVID-19 crisis dropped by at least 50% as compared to total revenues generated in the corresponding period immediately preceding this year (for this group of related entities, the obligation to submit transfer pricing information to the Head of the National Revenue Administration shall remain in force);
- changes that make it easier to sign declarations on preparing a local file for transfer pricing. The declaration, submitted for the tax (fiscal) year or at the time when there was a state of epidemic emergency or a state of epidemic declared due to COVID-19 on the entire territory of the Republic of Poland, may be signed by:
- a natural person: in the case of a related entity that is a natural person;
- a person authorised by a foreign entrepreneur to represent him or her in the branch: in the case of a related entity being a foreign entrepreneur having a branch on the territory of the Republic of Poland;
- a person authorised to represent: in the case of other related entities
– however, a declaration cannot be submitted by a proxy.
Even though the changes put forward due to the COVID-19 epidemic are temporary in nature, they are surely welcome in the prospective regulations. On the other hand, the introduction of additional administrative obligations, i.e. tax strategy reporting, or additional obligations for taxpayers concluding transactions with tax haven entities goes in the opposite direction. Currently, the Draft is at the evaluation stage that will last only until 21 September this year. We will keep you informed about the progress of legislative works in this area.
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