TAX ALERT: Transfer pricing 2020

1. New TP-R form

Taxpayers should already prepare to filing the first new electronic TP-R form - by correctly documenting transactions for 2019 - in September 2020 (at the end of the 9th month from the end of the tax year), on the basis of which tax authorities will choose entities for tax audits.

The TP-R form will have to include e.g. the taxpayer’s financial information (values of financial indicators being a measure of the taxpayer's financial situation), information about related parties and controlled transactions, information concerning methods and transfer prices, as well as their corrections, return indicators and information concerning restructuring of the entity). Reporting with the use of TP-R forms will require from taxpayers to have detailed records of data, maybe even to adjust their accounting systems to the requirements of the new regulations. Due to the scope of information contained in TP-R forms, accounting data records should ensure the possibility to obtain such financial parameters of transactions as, inter alia, operating margin, gross profit margin, return on assets, return on equity, gross and net mark-up from sales, operating mark-up or Berry ratio. 

Because of a vide range of reportable data, the TP-R form is to constitute an analytical tool for the fiscal administration to perform comprehensive analyses, including assessing how the result of the given entity compares to the competition and if a benchmarking was done at all.

TP-R form is to be submitted by taxpayers required to prepare TP documentation, regardless of their size, and - although in a limited scope - by taxpayers exempt from the obligation to have local TP documentation.

2. Statement of the Management Board

Additionally, it is obligatory to file a Statement of the Management Board (all its members) for 2019 about the compliance of transactions made/transfer pricing applied with the arm’s length principle (not about being in possession of any TP documentation). Such a statement will be filed under pain of penal and fiscal liability.

 3. Transaction reclassification

Tax authorities will also be able to perform a so-called re-characterization of transactions with related parties (e.g. change a loan to a share capital increase transaction) and assess tax results from this newly classified transaction. Moreover, they will be entitled to decide that no transaction took place or the one that did was of apparent character or one independent entities would not have agreed to (intangible services are especially at risk here), and to impose an additional tax, e.g. exit fee in case of business restructuring consisting in moving production/sales/licence etc. functions to another affiliated entity).

4. Additional sanctions

Unfortunately, recently a failure to comply with TP documentation obligations or conducting transactions on conditions other than arm’s length terms has become subject not only to fiscal penalties and the risk of paying tax according to the higher rate of 50%, but also additional sanctions such as an additional tax liability (in the amount of 10 to 30% in case tax authorities determine a market price different than the one settled for by the parties). What is important is that the possibility to apply an additional tax liability will also concern transactions not subject to the obligation to prepare transfer pricing documentation, hence even in case of taking benefit of documenting exemption for domestic transactions (in case of transactions among affiliated domestic entities that do not incur losses), the transaction’s conditions have to be examined every time and compared to those on the market.

In the case of making risky transactions and high-value transactions, even if exemption may be applied, tax documentation should be kept.

5. Extension of the definition of affiliation in capital

New provisions enlarge the list of capital and personal affiliations. Capital affiliations may result not only from equity participation, but also from e.g. a voting power in the company governing bodies and participation in rights connected with share in gains or in assets (affiliation through fund shares, units) - investment funds, foundations.

As far as personal affiliations are concerned, the key factor conditioning the existence of affiliations shall be exerting a significant influence on economic decisions made by the company, even in the absence of a formal authorization from the decision making or control bodies.

Tax authorities will then be able to consider as affiliated entities among whom there is a relationship not resulting from grounded economic reasons, including one aiming at establishing a structure enabling to circumvent transfer pricing regulations.

6. Increased documentation thresholds and obligation to prepare benchmark study each time

Materiality thresholds conditioning the obligation of preparing transfer pricing documentation are as follows:

• PLN 10 million - approx. EUR 2.5 million for transactions concerning tangible assets and financing; and
• PLN 2 million - approx. EUR 0.5 million for service and other transactions.

Taxpayers required to prepare Local Files are also required to conduct benchmarking studies for each transaction. The purpose of the Local File is to provide evidence of the arm’s length character of transactions made with related parties.

Therefore, the Local File documentation contains at present a compulsory element called the transfer pricing analysis (benchmark or conformity analysis).

7. Exemptions from documenting obligations

The following transactions are examples which do not require preparing local transfer pricing documentation: controlled transactions made between domestic entities (on certain conditions), transactions among entities from one capital group, transaction among entities whose affiliation results only from affiliation with the State Treasury or local and regional authorities, transactions whose prices were determined in an open tender procedure, and also transactions whose value does not constitute continuous revenue or tax deductible expense (excluding financial, capital or investment-related transactions, fixed assets or intangible assets).

In order for the transactions with domestic affiliated entities to be exempt from the obligation of having documentation prepared, neither of the transaction party can benefit from the tax exemptions provided for in the CIT Act or incur losses in a given tax year.

In such a case, we would also recommend preparing TP documentation, in particular conducting benchmark studies/conformity analysis, since during a tax audit, the taxpayer - in order to avoid sanctions - will be required to prove that transactions with related parties were made on arm’s length conditions.

8. Group transfer pricing documentation (Master File)

The group transfer pricing documentation is obligatory only for entities subject to consolidated financial statements and in case consolidated revenue of the group for the previous year exceeded PLN 200 million.

It is possible to have Master File documentation in English, on the condition that it is complete and contains all the elements indicated in the Polish provisions. At the request of tax authorities, the taxpayer may be required to submit group transfer pricing documentation in Polish within 30 days of receiving such a request letter. Therefore, the documentation has to be adjusted to local regulations on an on-going basis.

9. Safe harbours

The authorities shall be entitled to refrain from verifying the arm’s length character of interest rate on loans and the arm’s length mark-up on low-value-adding services, once the requirements determined in regulations are met.

The provisions provide for a limit of the mark-up “up to 5%” of the costs for service purchase and “up to 5%” of the costs for the provision of services. As for loans, the most important is to determine the interest rate on the basis of the kind of the base interest rate (taking into account the loan currency) and the margin, according to a Notice of Minister of Finance.

The application of the simplified solution results in automatically recognizing the price or its element as arm’s length. Because of that, the taxpayers meeting the above-mentioned conditions are exempt from the obligation to contain transfer pricing analysis in their local documentation.

10. Other

On this occasion, we would also like to draw your attention to the fact that more and more often the authorities require the documentation of free of charge transactions (e.g. guarantees), and also of paying out remuneration to members of the management board.

In case of questions regarding the above topics, please kindly contact Mazars Tax Advisory Department.