In newsletter 9/2018, we informed you about the planned changes in transfer pricing. Now it is a fact: on 14 November 2018, the President signed the Act of 23 October 2018 amending the Personal Income Tax, Corporate Income Tax, Tax Ordinance Act and certain other acts. In the newsletter below we are going to summarise the regulations that have been introduced.
LEGAL DEFINITIONS INTRODUCED
In a new chapter, the legislator has introduced a glossary of legal definitions of terms typical for transfer pricing documentation. The defined terms include a ‘transfer price’, ‘material effect’ or a ‘controlled transaction’. The latter is going to replace the term of a ‘transaction and other event’ that is in place now and leaves quite a lot of room for interpretation.
NEW TRANSACTION THRESHOLDS
The twin track system of determining the obligation to prepare a local file has been abolished. Under the new regulations, taxpayer’s revenues or costs shall not be taken into account when defining thresholds. The documentation obligation shall be determined exclusively on the basis of the transaction value criterion. The legislator has defined two thresholds: PLN 10 million net for commodity and financial transactions and PLN 2 million net for service transactions and other transactions.
TRANSFER PRICING CONTROL INSTRUMENTS IN DETAIL
Under the amendment, tax authorities shall have special rights to determine the amount of taxpayer’s income or loss, thus the power of an administrative decision that a given transaction would not have been concluded between non-related entities (non-recognition) or that it would have been concluded on different conditions (re-characterization).
Afraid of overvaluing your income from transactions with related parties?
FIND OUT MORE
USING THE METHODS OF TRANSFER PRICE ESTIMATION
The amendment sets forth that a so-called other method can be used to verify transfer prices in justified cases, including the estimation technique that is the most appropriate in given circumstances. Another method shall be used only if it is not possible to apply one of the five methods for estimating transfer prices.
The next change involves the introduction of brand new simplified solutions known as safe harbours; if a taxpayer uses safe harbours, the price or a price element shall be recognised as arm’s length, and there shall be no obligation to prepare a transfer price analysis. In order to rely on this solution, the taxpayer will have to meet a number of conditions stipulated in the act. Safe harbours shall apply to low-value adding services and loans (bank loans, bond issue).
NEW DOCUMENTATION EXEMPTIONS
The amendment has introduced new documentation exemptions, including but not limited to controlled transactions concluded between domestic entities (provided that these entities do not enjoy specific tax exemptions and did not suffer a tax loss) and transactions that are not revenue or a tax-deductible cost in their entirety (excluding certain transactions).
Under the new regulations, the documentation requirements shall be uniform, so that elements of local (and master) file are in line with the OECD guidelines. The local file should include: details of the related entity, details of the transaction (including the analysis of functions, risks and assets), analysis of transfer prices (benchmarking study) and financial information. An obligatory element of every local file shall thus be a transfer price analysis. This means that preparing the analysis shall not hinge upon exceeding an additional threshold, like it used to be.
The obligation to have a master file shall pertain to related entities that are members of a group of related entities for which a consolidated financial statement is prepared and whose consolidated revenue exceeded PLN 200 million. The master file shall include the following obligatory elements: details of the group, details of essential intangible assets of the group, details of essential financial transactions of the group along with the group’s financial and tax information.
DECLARATION ON PREPARING TAX DOCUMENTATION
The amendment sets forth that the declaration on tax documentation shall be signed by the head of the unit. At the same time, the new regulations clearly define that the declaration cannot be submitted by a representative. What is interesting, the taxpayer will have to directly indicate that the applied transfer prices have been defined at using the arm’s length principle.
INFORMATION ON TRANSFER PRICING (TP-R)
The CIT/TP or PIT/TP statements that have been in place so far are going to be replaced by online reporting in the form of TP-R. Related entities obliged to prepare a local file and concluding controlled domestic transactions shall be under obligation to submit the information about transfer pricing.
TRANSFER PRICING ADJUSTMENTS
The amendment also sets forth how taxpayers shall make transfer pricing adjustments resulting from the differences between the expected level of profitability and the profitability actually achieved by the taxpayer. The introduced rule defines that the adjustment of transfer prices shall be the revenue or the tax-deductible cost, respectively, provided that the conditions set forth in the act are met.
Under the new regulations, the 50% penalty rate shall be abolished and replaced with the institution of an additional tax liability, regulated directly in the Tax Ordinance, amounting to 10% of the amount of unduly recognised or overstated tax loss. This rate may be doubled or tripled in pre-defined cases.
PERMANENT EXTENSION OF DEADLINES
By the end of:
9th month after the end of the fiscal year
12th month after the end of the fiscal year
The discussed regulations will enter into force on 1 January 2019. However, the amendment allows to apply new regulations to controlled transactions concluded already in 2018, provided that they shall be applied to all the controlled transactions of the taxpayer concluded in this fiscal year.
Subscribe to RSM Poland Newsletter to stay up-to-date on all legal, financial and tax matters. Benefit from the expertise of our professionals.
Should you have any questions or need to discuss the topic further, we encourage you to contact our expert, Tomasz BEGER:
tel. +48 61 8515 766
fax +48 61 8515 786