Tax Partner at RSM Poland
There has been a lot of talk about changes in transfer pricing regulations over the last 3 years.
Changes, changes, changes...
In 2017, there was a revolutionary change when the method of determining transaction thresholds triggering the obligation to prepare transfer pricing documentation was linked to revenues or costs incurred by the taxpayer in the previous financial year (i.e. something to resemble the "materiality criterion"). Transfer pricing documentation for 2017 included a local file, comparative analysis (for entities which generated revenues or incurred costs of EUR 10 million in the previous year) and the master file. Another major turnaround occurred in 2019 with the amendment of the Corporate Income Tax Act and the Personal Income Tax Act. The complicated method of determining transaction thresholds was abandoned by introducing fixed documentation thresholds for homogeneous (uniform) controlled transactions (this was beneficial for some entities, but not necessarily for others). Furthermore, making life easier for taxpayers, the legislator introduced a safe harbour and exemptions from the documentation obligation for Polish entities which, among others, did not incur a tax loss in a given year and performed domestic transactions. New sanctions and the responsibility of managers of related party transactions of an arm's length nature are certainly a matter of some concern to taxpayers. What are the reasons behind these concerns?
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No longer a penalty rate, but an additional tax liability instead
In practice, the 50% penalty rate was a sanction that was very rarely used so far. If, as a result of an inspection, a tax authority determined the taxpayer's income to be higher or the loss to be lower than declared, the taxpayer was, as a rule, taxed at the rate applicable to the given tax year (19%). Additional income was taxed at the rate of 50% when a taxpayer did not submit transfer pricing documentation or the documentation was incomplete (it did not contain all the necessary elements as listed in the tax legislation). The penalty rate was applied to the difference between the income declared by the taxpayer and the amount determined by tax inspectors.
At the beginning of 2019, the penalty rate of 50% was replaced by the so-called additional tax liability. It can range from 10% to 30% of the assessed additional (i.e. added) tax base. The provisions concerning the amount of the tax liability are included in Chapter 6a of the General Tax Act (hereinafter referred to as the “GTA”), in Article 58 and others. In accordance with the amended provisions of the General Tax Act, if the price in a related party transaction is not an arm's length price, inspectors will impose an additional tax liability on the taxpayer of 10% of the overstated loss or understated income. However, such a rate may be multiplied further. The rate will be doubled if the basis for determining the additional tax liability exceeds PLN 15 million - and the double rate will apply to such excess, or if a taxpayer has not submitted its transfer pricing documentation. The rate will be tripled when, at the same time, the basis for determining the additional tax liability exceeds PLN 15 million and the taxpayer has not submitted its transfer pricing documentation.
As it is known, when preparing transfer pricing documentation for 2018, taxpayers could already choose to apply the regulations which came into force as of 1 January 2019 if the choice of that legal regime seemed to be more advantageous to them. At the same time, the rates of the additional tax liability as described above will only apply to transfer pricing documentation for 2019. Therefore, in spite of choosing the amended tax legislation, any sanctions imposed on a taxpayer for not having the required transfer pricing documentation or for entering into transactions that are not at arm's length, will apply in accordance with the existing law (i.e. 19% or the penalty rate of 50%).
Statement (not only) on the preparation of transfer pricing documentation
The amended provisions of the CIT Act and the PIT Act imposed an obligation on taxpayers to submit a statement on preparation of a local file for controlled transactions by the end of the 9th month after the end of the tax year. Such a statement was to be submitted to the head of the tax office. The law did not specify expressly who should sign such a statement, and that responsibly was usually taken by persons holding managerial positions. From 2019 onwards, apart from confirming that local transfer pricing documentation has been prepared, the statement submitted to the tax office must include a declaration that prices applied in controlled transactions between related parties were at arm’s length. Furthermore, it was made clear that the statement is to be signed by the management of the entity (kierownik jednostki) within the meaning of the Accounting Act (which means, in fact, that it is to be signed by the entire management board of a company) and such responsibility cannot be assigned to a proxy. With regard to the statement that the transfer pricing documentation has been prepared, fiscal penal liability is imposed on managers for failure to submit such a statement, for submitting it late or for certifying false information. Under Article 56c of the Fiscal Penal Code (“FPC”), the fine for such fiscal misconduct may range from 10 to 720 daily rates. The liability of managers for transaction terms of an arm's length nature raises considerable concerns. This will undoubtedly make managers analyse transaction terms more thoroughly as early as at the stage of pricing before the transaction goes ahead. It is also necessary to verify, on an ongoing basis, whether what was agreed is the same as the terms which would be agreed in similar but uncontrolled transactions on the market. The introduction of such a regulation will also be a strong reason in the future to fight with tax authorities “till the last breath” to demonstrate that terms of controlled transactions were at arm’s length. This is because, giving up on such a fight would practically result in fiscal penal liability of the management pursuant to the above mentioned Art. 56c of the FPC.
There is no doubt that the sanctions introduced under the law that has formally entered into force as of 2019 may be much more severe for taxpayers in the event of failure to comply with transfer pricing reporting or documentation duties. This applies both to financial liability and potential additional burdens on the entity, but also on members of its management board. This is clearly an "incentive" from the legislators for Polish entities to thoroughly review the terms of related party transactions. How effective will this be? Time will tell as will the amount of additional income assessed by authorities in the future.
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