RSM Poland


COVID-19 affecting transfer pricing – risks and challenges faced by related entities

Reduced income, increased costs, downtime in production, issues with suppliers of raw materials and consumables, impaired efficiency, insolvency – this is only a handful of adverse effects faced by businesses in the current situation being a result of the SARS-CoV-2 pandemic. The economic crisis caused by the state of epidemic threat and epidemic announced in Poland as well as in many other countries due to the spread of COVID-19 poses a threat also in terms of the fulfilment of documentation and reporting obligations regarding transfer pricing. We would like to present key risks and challenges in transfer pricing faced by related entities amid the COVID-19 pandemic.

Changes in supply chains and change of the functional profile

In some cases there may be a reorganisation of the supply chain in terms of supplies carried out between related entities as a result of e.g. limited production capacity, closing production plants in some regions, considerable decrease in revenue, the use of certain means of transport being hindered or even impossible. In such cases, it will be necessary to reclassify a taxpayer to fall into a given functional profile or to verify if the determined functional profile (resulting from e.g. group contracts) is compliant with the course of the transaction in the current situation (e.g. if the crisis caused the occurrence of risks and if they were absorbed by related entities in accordance with their profile). However, the change in the distribution of economically vital functions, assets and risks between related entities having impact on the taxpayer’s income constitutes a restructuring that must be reported in the transfer pricing documentation. To determine if such an obligation arises,  businesses must conduct a review.

Changes in transaction terms

Due to the changing economic environment, there certainly will be a need to verify the terms of carrying out transactions between related entities. All changes as to the manner of settling transactions, postponement of payment deadlines etc. must be reviewed for compliance with the transfer pricing regulations. It is particularly vital to review if the applied method and manner of calculating remuneration corresponds with the market price adjusted to the current economic conditions. In the justification of the amendment to the transfer pricing regulations effective as of 1 January 2019 (Journal of Laws of 2018, item 2193),  the legislator indicated that “(…) under Art. 11c sec. 1 of the CIT Act and Art. 23o sec. 1 of the PIT Act, the taxpayers are obliged to apply market prices also in the course of the year, to their best knowledge and experience”. Due to the above, it is vital to document and rationally justify all adjustments to ensure compliance with the arm’s length principle. Another challenge is to verify if the change of the situation caused by the COVID-19 pandemic has significantly affected the transactions covered by the Advance Pricing Agreement (APA) or an individual ruling. If so, there is a high risk that they will be repealed or that they will lose their protective binding effect.

Afraid of overvaluing your income from transactions with related parties?

Profitability change

In many cases it may turn out that the 2019 profitability level cannot be reached in 2020. Thus, entities which so far have generated profit, due to the economic crisis caused by the COVID-19 pandemic may incur a loss. This would, unfortunately, disallow the exemption from the obligation to prepare the local file imposed on domestic entities under Art. 11n p. 1 of the CIT Act. Thus, in 2020 this obligation may be imposed on a greater number of entities than in 2019, due to the fact that one of the conditions exempting the transactions between them from the documentation obligation will not be met. Moreover, without the evidence confirming the impact of external factors related to the current economic crisis on the adjustment of remuneration in transactions between affiliates, thus on their profitability, there is a risk that the taxpayers may have their income estimated by the tax authorities.

Benchmarking update

It seems that in most cases it will be necessary to update the benchmarking, as pursuant to Art. 11r of the CIT Act “the benchmarking and the compliance analysis shall be updated at least once every three years, unless the change of the economic environment affects the analysis to an extent justifying the update in the year in which the change occurred”. The economic crisis being a result of the COVID-19 pandemic certainly is a significant change in the economic environment, however, it should be reviewed if its impact on the benchmarking prepared in previous years is indeed significant. For the majority of taxpayers this surely is a change that has significantly affected their business situation, however, some business sectors will go through the current crisis quite unharmed, and thus in such cases the update of the analyses may be pointless. Still, relying on the analyses prepared prior to the pandemic, on the basis of data that fail to take the current market and macro-economic situation into consideration, will be subject to a thorough inspection of the tax authorities and there is a high risk that the benchmarking will be contested. Here is yet another challenge: when should the benchmarking be updated? Under the previously discussed Art. 11c of the CIT Act and the relevant justification, the market pricing shall be also determined in the course of the year, which actually means that the update should be effected just now. Conducting the benchmarking on the basis of external data means verifying the financial data, and, unfortunately, the 2020 financial statements will be available no earlier than next year. Thus it seems reasonable to prepare the update e.g. relying on the projected or historical data, with an additional explanation stating that the presented financial information fail to fully reflect the 2020 market situation. It may be necessary to update the analyses once again in 2021 so that they include the actual 2020 financial data.

Transfer pricing adjustments

The hindered accessibility of the financial data published in databases gathering financial data affects also transfer pricing adjustments. Pursuant to Art. 11e p. 1 of the CIT Act, to make transfer pricing adjustments, the price must constitute a market price already in the course of the year. In some cases it may turn out that making adjustments will be impossible before the benchmarking update. What is more, the financial data of entities operating on the market are available after a considerable delay, taking into account the date of submitting the  CIT-8 return indicating the transfer pricing adjustments made in relation to the tax year to which the return pertains. If the transfer pricing adjustment is made after the deadline for submitting the return, there will be a need for an amendment. This fact impacts also the statement of the preparation of the transfer pricing documentation in which the members of the management board confirm that the transfer pricing in transactions with affiliates comply with the arm’s length principle. Any adjustments made afterwards  may expose the members of the management board to fiscal penal sanctions.

Tax inspections

Due to the falling state revenue, in the coming years we should expect an increased level of inspections conducted by tax authorities, particularly in terms of transfer pricing and mostly regarding transactions effected in 2020. Among those exposed to the highest risk are entities  which so far have generated profit but due to the economic crisis will incur a loss.


The COVID-19 pandemic has a negative impact on the majority of businesses, also due to the transfer pricing obligations which must be thoroughly reviewed and, if any changes need to be introduced,  properly documented. Especially that for the majority of entities the Anti-crisis shield regulations, in their current form, fail to provide for the postponement of deadlines for the submission of the statement of the preparation of the local file, TPR and attaching group transfer pricing documentation. The only exception concerns entities with a shortened tax year (the tax year began after 31 December 2018 and ended before 31 December 2019). In such case, the deadlines have been postponed until 30 September 2020.

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