Tax Supervisor at RSM Poland
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. This year, tax documentation will also constitute one of tax control priorities (vide The National Action Plan of Tax Administration for 2015).
By when does a taxpayer have to prepare the documentation?
The legislator has not set any particular deadline for a taxpayer to prepare the tax documentation. According to tax authorities and administrative courts, however, the very fact of occurring circumstances referred to in Art. 9a section 2 of the CIT Act (exceeding the sales thresholds), is binding for related parties and entails preparing the documentation. Taking into account the wording of Art. 9a and Art. 11 of the CIT Act, as well as the nature of tax documentation and its main purpose, a taxpayer should complete the documentation on an ongoing basis, as the transactions that, from the point of view of the Act, are considered to be related party transactions progress. This means that the taxpayer should not wait until the end of a tax year to collect all the necessary information but rather gather the data during the year. The 7-day period is time for providing tax authorities with all the required documents and not for preparing the documentation from scratch.
Preparing the documentation within 7 days does not guarantee protection
A quite controversial judgement in this matter was pronounced on 3 April 2014 by the Voivodeship Administrative Court in Gorzow Wielkopolski. The said case concerned tax documentation prepared during tax audit, in which situation tax authorities had clear evidence that the documentation was prepared within 7 days from receiving the call to provide it. The Court has emphasized that a taxpayer is obliged not only to submit the documents within the mentioned period of 7 days, but also to prepare it on an ongoing basis (within the given year). Both of these requirements should be met. The documentation that was prepared during and for the purpose of the tax control was in this case considered unreliable and, therefore, did not protect the taxpayer against the 50% penal tax rate.
The legally binding decision of the Supreme Administrative Court, which will be issued in this particular case, will hopefully refute the arguments of the court of first instance. Finding the tax documentation unreliable only because it was prepared during the control and not completed systematically, is far beyond the law regulations on transfer pricing, which regulations do not explicitly impose the obligation to prepare the TP documentation on a taxpayer. Applying the penal tax rate once the taxpayer has provided the required documents is contrary to Art. 19 section 4 of the CIT Act. The legislator has, indeed, not specified that one can avoid the 50% rate only when having prepared the documentation systematically in a year.
Changes are afoot
From the year 2016 material changes in transfer pricing are to be introduced. The changes result from new guidelines on tax documentation issued by OECD. Now, The Ministry of Finance works on a new bill that, among others, will redefine related entities obliged to prepare the documentation and the type and content of the documentation itself will depend on the amount of revenues generated by a taxpayer and costs incurred.
What else to pay attention to? The legislator is planning to set a clear and an unambiguous deadline for preparing the tax documentation – not later than by the date of submitting a tax return for a given tax year. Considering the pace at which the works on these changes proceed, there is a huge chance that new regulations on transfer pricing will become applicable from the very beginning of the next year.
What does this mean for taxpayers? First and foremost, there will be no more doubts about when one should prepare tax documentation. The entrepreneurs who make various transactions with many entities of the Group should be on their guard because 3 months from the end of a financial year is definitely not enough for preparing complex documentation. In their case, it will be necessary to start obtaining and collecting the data required in TP documentation early enough in the year.
So, Is it worth…?
Coming back to the title question, one can answer without hesitation: Yes, it is really worth preparing TP documentation on an ongoing basis. Thanks to such approach, we could be sure that the 50% penal tax rate would not apply to us. We could also avoid various technical problems that are likely to occur when preparing the documentation within the 7 day period and the risk that tax authorities would find our documentation unreliable. The planned changes will once and for all regulate the issue, setting a particular deadline for preparing the documentation. They will also make taxpayers think about transactions with related parties as ex ante and not ex post – such thinking is also supported by the current judicial decisions, indicating that TP documentation should be prepared systematically. It will be definitely something of a revolution for Polish taxpayers, for whom the issue of transfer pricing was rather marginal and not one to be bothered about. Within the same time period they will be required to both submit the annual tax return and to prepare the tax documentation.
 The National Action Plan of Tax Administration for 2015, The Ministry of Finance, page 11.
 E.g. The judgement by the Voivoidship Administrative Court in Gdansk of 19 June 2013, file ref. no. I SA/Gd 529/13, individual tax ruling by the Director of the Tax Chamber in Warsaw of 6 August 2014, no. IPPB5/423-446/14-2/AS, and of 18 December 2012, no. IPPB5/423-821/12-2/AS.
 File ref. no. I SA/Go 86/14.
 Bill of 27 April 2015 to amend the Personal Income Tax Act, Corporate Income Tax Act and some other legal acts.