Tax Consultant at RSM Poland
Pursuant to the Regulation of 27 April 2018, the Ministry of Finance (hereinafter: MF) established the Transfer Pricing Forum (TPF) to respond to taxpayers’ needs concerning the clarification of different aspects of transfer pricing. The forum is a team comprising people who are professionally involved in transfer pricing, both as regards theory and practice, as well as the MF and the National Revenue Administration representatives.
The Forum works in Working Groups. Unfortunately, the analyses, conclusions and other studies of the TPF Working Groups are not binding for the MF or tax offices directly reporting to the MF. However, they give the taxpayer a certain insight into some debatable, hence essential, issues.
So far, 4 documents with Working Group recommendations have been published on the MF website. The first part will briefly discuss the most important conclusions and postulates from the works and consultations of Working Group No. 1 and 2.
Recommendations on technical aspects of preparing benchmarking studies: part 1 (study by Working Group no. 1)
The first published recommendations pertain to transfer pricing regulations that have been in force since 2017.
As regards the preparation of a benchmarking study, it has been pointed out that comparability factors are the starting point for determining data comparability. Depending on the applied method of determining revenue, you compare either the subject of the transaction or the party to the transaction (entity). If it is possible to apply the comparable uncontrolled price, the benchmarking study is going to primarily investigate the characteristics of the subject of the transaction. For other tax methods, the functional profile of potentially comparable entities will be analysed, among others.
Opting for relevant comparability factors is important for the choice of the geographical market from which comparables are sourced. The choice of the domestic, European or international market for sourcing data is of secondary importance compared to the applied comparability criteria and specific nature of the transaction. It is not obligatory for the taxpayer to use data from the Polish market; however, when doing the benchmark, the taxpayer should include this market in comparability criteria. The lack of comparables from the Polish market in benchmarking results means that comparables from this market failed to meet the comparability criteria, and benchmarking was made according to the transfer pricing regulations in force.
For the taxpayer, the most optimal solution is to rely on internal comparables, both in terms of the level of detail of the obtained data and the costs of procuring it. At the same time, this solution is preferred by the tax authorities. However, making such a benchmark may prove objectively impossible in practice, even if the entity has concluded transactions with non-related parties.
For example, when benchmarking internal comparables in the comparable uncontrolled price method, it is essential to have identical characteristics of goods or services being the subject of both the controlled transaction and the transaction with non-related entities. The conditions and the course of these transactions must be alike, as well; the same goes for the comparable scale of cooperation. What it means in practice is that relying on internal comparables may prove wrong because of material differences between these transactions. In such a case, benchmarking must be based on external comparables.
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Recommendations emphasise that transfer pricing provisions do not define any minimum or maximum number of observations adopted for the final comparability sample. What is important is that comparables chosen in the identification process must meet the pre-defined criteria concerning their quality. Similarly, in the case in which comparability criteria are met, there is no reason to reject extremely high or low values. These values are usually eliminated by using statistical measures for defining the final range of arm’s length results. Any rejection of this data from the benchmark should only result from the fact that they fail to meet the pre-defined comparability criteria.
To confirm that the transaction is at arm’s length, you may use any value from the arm’s length range defined in the performed benchmark. It is essential to provide a rational justification for the value that was taken from the range for comparison or the applied results of statistical measures, such as the median or average value.
If there are no comparables available, the taxpayer shall be obliged to prepare a description of compliance. Recommendations in this respect have been prepared by Working Group No. 2.
Recommendations on preparing descriptions of compliance of transaction conditions and other events agreed with related parties with conditions that would have been agreed by non-related entities (study by Working Group No. 2)
According to recommendations, the taxpayer should first make an attempt at benchmarking, based either on internal or external comparables. A description of compliance shall be made only if there is no comparable data.
The description of compliance is supposed to show that conditions of the transaction with a related party had been agreed the way non-related entities would have done it. The fact that the concluded transaction was rational and economically justified should be objectively substantiated with available information, knowledge and a description of the specific nature of the industry in which the entity operates. This description may take any form; however, it will surely be determined by the data and information held by the entity at the time of the transaction’s conclusion.
The description of compliance may, for example, include: appraisals, opinions or expert studies prepared by independent professionals, industry reports or analyses (replacement value, residual value, return on investment, alternative cost) available to the general public. The taxpayer may rely on data from quotations obtained from non-related entities before the transaction, open data posted on websites, or stock quotes.
The Working Group has come up with a postulate that the taxpayer should have the right to prepare a description of compliance also in the case in which obtaining external comparables is not economically justified due to e.g. the small scale of business and high costs of purchasing such data.
Summing up, recommendations of Working Group No. 1 emphasise the importance of the choice of factors for the benchmarking study. The choice of appropriate criteria has an impact on defining the market from which comparables will be taken. It is important, because if you read the provisions of the CIT Act and PIT Act in a straightforward manner, you may think that the Polish market is the preferred market (point of reference). This is not the correct interpretation, however, because comparables chosen for benchmarking are considered correct provided that they meet the comparability criteria, and it does not matter from which market they are sourced. Thus, data from the domestic, regional or international market have the same value.
Furthermore, we welcome the postulate of Working Group No. 2 that the description of compliance can be prepared instead of a benchmarking study in justified cases.
Recommendations prepared by Working Group No. 3 will be discussed in the next post.
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