Tax Partner at RSM Poland
Transfer pricing is no longer a purely theoretical issue, but a factor to be taken into account on a daily basis in transactions with related entities. The number and nature of changes that taxpayers have to face in this area is quite challenging. And even though the most recent changes have entered into force as of 2019, taxpayers may decide to apply them to their tax documentation for 2018, as well.
What transfer pricing regulations can be applied to tax documentation for 2018?
Both 2017 and 2019 brought about many revolutionary changes in the area of transfer pricing. Preparing tax documentation for 2017 after the first change of regulations was quite a challenge for taxpayers due to a large number of significant modifications as compared with the regulations earlier in force. This is primarily about a different method of determining the documentation obligation and the value of transactions, which hinged upon the amount of revenue the entity generated and expenses the entity incurred in the previous fiscal year. Entities generating revenue or incurring expenses below EUR 2 million were exempt from the documentation obligation. What was of paramount importance as well was the introduction of different levels of detail for reporting, depending on the entity’s size (according to the principle: the bigger the taxpayer, the largest the scope of their documentation).
Benefits resulting from changes
Although the regulations that entered into force as of 2019 cannot be defined as a revolution, they are clearly different in many respects from the regulations introduced in 2017. Most of these regulations are beneficial for taxpayers, because the legislator’s effort to bring the Polish legislation in line with the OECD guidelines should be evaluated positively. It is a big plus that legal definitions in the field of transfer pricing were introduced, along with the option of using safe harbours and exemptions from the reporting obligation for domestic entities.
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Not everybody is happy
On the other hand, taxpayers will disapprove of the obligatory benchmarking study for all transactions for which tax documentation is prepared, increased liability of the management board for attesting that the transaction is at arm’s length (on pain of penal and fiscal liability) and the enigmatic provision on the relation between the parties to the transaction resulting from having a material impact.
What is interesting in the context of the aforesaid changes is that the 2018 tax documentation can be prepared either according to the amended or earlier regulations. Thus, it is the taxpayer who decides which regulation package to apply. What should be considered before making this decision? The below discussion of documentation obligations resulting from both regimes shows that the choice is not as obvious as it may seem.
Documentation thresholds and exemption
Undoubtedly, a material difference between documentation obligations set forth in 2017 and 2019 regulations is the method of calculating the so-called documentation thresholds. Since 2019, they do not depend on the amount of revenue generated in the previous fiscal year or the amount of incurred expenses. The fact that the transaction threshold was increased to PLN 2 million for transactions involving services and to PLN 10 million for goods or financial transactions is a good change. In addition, the legislator indicates that it is about the net value of the transaction, i.e. without VAT; it has not been clearly specified before, hence taxpayers would often report the gross value of the transaction when determining the documentation obligation, just to be on the safe side. What is more, with complex formulas for calculating the transaction value depending on the amount of generated revenue or incurred expenses, it was not easy to single out transactions to be covered by transfer pricing documentation for 2017.
As regards the master file, as of 2019 it must be prepared by entities belonging to a group of related entities for which consolidated financial statements are prepared and the consolidated revenue exceeded the amount of PLN 200 million or its equivalent in the previous fiscal year. In the fiscal regime in force since 2007, the master file had to be prepared by the taxpayer who generated revenue or incurred expenses in the amount equivalent to at least EUR 20 million in the previous year. Thus, any entity generating revenue or incurring expenses at the above level and being a part of a group of related entities for which consolidated financial statements were not prepared, had to prepare a master file. Applying the new fiscal regime for 2018, such an entity would not have the obligation to prepare a master file. On the other hand, entities being a part of a capital group, whose consolidated revenues in the previous fiscal year exceeded PLN 200 million, shall be obliged to have a master file in their transfer pricing documentation regardless of the amount of revenue earned by them locally. In addition, as of 2019, the taxpayer may use a master file in English prepared by the group it is a part of. Obviously, a precondition here is that this document meets Polish formal requirements.
Exemptions for domestic transactions
What is most important is that if you apply the fiscal regime introduced in 2019, you can be exempt from the documentation obligation for domestic transactions concluded between related entities in the case in which these entities have not recorded a tax loss and do not benefit from income tax exemptions (e.g. in SEZs). With this mechanism in place, taxpayers can reduce their documentation obligations, and if they conclude group transactions only on the Polish market, they are totally exempt from this obligation. This is a long-awaited and very favourable change that may contribute to the decision to apply 2019 regulations to tax documentation for 2018. At the same time, it should be noted that being exempt from the documentation obligation does not mean that you are not obliged to conclude your transactions at the arm’s length principle, and the risk involved continues to be borne by the taxpayer.
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