On 19 November 2018 draft new regulations on transfer prices were published on the pages of the Government Legislative Centre.
A combined public consultation 4 Draft Regulations (after two for each income tax bill).
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Transfer pricing documentation regulation – specifying the elements of the documentation.
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Transfer pricing regulation – specifying in particular how the comparability analysis is to be carried out, how transfer pricing methods are to be applied and how to deal with market conditions for restructuring operations.
Below are the most important changes resulting from the proposed regulations for the practice of documentation and analysis.
Changes in the preparation of local documentation
A comprehensive description of the entity's organisational structure will be required, together with the identification of organisational cells that operate in the company and the number of persons assigned to them. As regards the description of the management structure, taxpayers should indicate which persons are involved in the decision-making process to which the results of the company are reported.
As part of the description of the core economic activity, it will be necessary to take account of the geographic markets in which the related entity operates.
Further novelties relate to the description of the transaction in which, in addition to defining the subject matter and type of the transaction itself, it will be necessary to indicate the relationship between the controlled transaction and other transactions, while the taxpayer should do so with an appropriate breakdown by specific counterparties. As regards the description of transactions, taxpayers are also expected to indicate how the transfer price should be calculated, where the taxpayer should indicate the actual calculation of that price, together with the assumptions taken.
In addition to contracts and agreements, the taxable person will also be obliged to include the tax interpretations obtained concerning the controlled transaction.
The Regulation defining the contents of local documentation sets out what elements should be included in the analysis of transfer prices, where the new requirement is to provide internal or external comparative data in the form of a spreadsheet which will enable their editing, grouping, sorting and verification. This is directly related to the changes in the comparative analysis process itself, as shown by second this draft regulation, which we also mention in the following part.
On the other hand, the principle of territoriality of data, i.e. the comparative data to which the taxpayer refers, does not have to be limited to the entities established or managed in Poland, as is the case under the current regulations.
On the other hand, the requirements for financial information appear to be set at a higher level, as it was necessary to indicate the full approved financial statements and a description allowing the financial data on transactions to be assigned to the position of the financial statements.
Changes in group transfer pricing documentation
In the case of group documentation, the proposed changes are not so radical, they are primarily editorial and more precise, but it is worth noting the extension of the description of the subject matter and scope of activities carried out by the capital group by indicating, among others:
(a) a description of the key factors determining the competitive advantage and the potential for development of the capital group,
(b) a concise verbal description of the functional analysis representing the significant participation of related entities in the creation of values within the capital group.
Changes in the performance of the comparability test
one The basic principles of the proposed Regulation are to emphasise the crucial importance of an overall analysis of the conditions between connected entities in the process of carrying out the analysis of the marketability of transactions.
The general criteria for comparability (known from the current and previous provisions) have therefore been drawn to the beginning of Chapter 2 Regulations were, however, abandoned in more detail to leave some flexibility to the authorities and taxpayers and the possibility of referring, if necessary, directly to the OECD acquis in this regard.
A modified list of the stages of the comparability study was also proposed, where as first the stage indicated the need to define the period covered by this investigation (the period is to be dependent on the facts and circumstances of the case, it does not have to be a period one of the year).
The proposed procedure is universal – to be used for all types of transactions; separate rules for conducting the comparability study for specific types of transactions have been waived. The regulation also tries to determine how statistical measures can be used in the context of the comparability study.
Importantly, a direct requirement has been introduced — all comparative data, the way in which they are obtained, the source, all the information which both taxpayers and authorities rely on for this purpose — must be disclosed. The explanatory memorandum also stresses that the Regulation is addressed to both tax authorities (for the purpose of indicating how the authorities should assess the compatibility of the conditions applied by entities associated with the market price principle), as well as to taxable persons for whom it is intended to be a set of rules allowing the actual use of market prices in transactions with related parties.
The draft regulation proposes a new definition of "difficult to value intangible assets" to be values for which reliable comparative data are not available at the time of their transfer and the foreseeable uncertainty is high. It also indicated which elements should be taken into account when assigning functions and risks to such transactions.
This issue is linked to the introduction of rules providing for the possibility of recalculation of the transfer price, i.e. the verification of ex post transactions by the tax authority using data which were not known at the time of the transaction, such possibility for two situation:
- • the aforementioned transactions involving a transfer of difficult intangible assets;
- • where the taxpayer has made such a change/update of the transfer price.
One novelty with the current rules is to extend the possibility of offsetting the terms of the transaction, which is also to be allowed in the option of offsetting the lower income obtained from controlled transactions in one one year with higher income from controlled transactions in the following financial year, which may be useful for long-term transactions over several years, where costs are incurred over years in which no economic benefits arise from such transactions.
Changes in the application of transfer pricing methods
Among the remaining modifications, it is also worth pointing out changes in the definition of the transfer pricing methods themselves, which, according to the authors' indications, were intended primarily to achieve greater transparency as regards the rules for applying the different methods.
In terms of the comparable transaction price method, the change is small and the procedure remains essentially the same as before for internal and external price comparison options.
In the case of the reselling method, it is clearly indicated that this is the method for purchasing transactions with a related entity in respect of goods and services sold to unrelated entities. The definition of the rules for setting the margin and the cost base has been simplified and it has been shown that this base includes direct and indirect costs linked to the sale (there is no exclusion of general costs of the board, but as indicated in the explanatory memorandum this is a editorial change since indirect costs do not include general costs of the board).
For the cost plus method, it was indicated that this is a dedicated method for transactions in which a related party sells goods or services to a related entity (previously purchased from outside or manufactured).
The rules for setting a cost base were also simplified, leaving the regulation that account should be taken of the sum of costs directly or indirectly linked to the production or acquisition of the object of the transaction.
According to the justification in this case, we can take into account the costs of the general management (if they are related to the controlled transaction).
In the case of the profit-sharing method, the change consists in clarifying that the division should be made with particular reference to the functions performed, the risks incurred and the assets involved and the simplification of the definition by abandoning the separate definitions of the residual analysis and the analysis of participation (it has been shown that this is too broad a question for the development of a clear legal definition, the MF announces further guidance in the form of binding tax explanations and refers to the OECD acquis).
Quite significant changes were proposed in the definition layer of the net transaction margin method. According to the new definition, this method should be based on the definition of the financial indicator to reflect the net profit ratio to the relevant base.
For the purpose of determining profit, account shall be taken of the costs associated with the execution of the transaction and, where costs that cannot be directly attributed are to be taken into account, the allocation key to reflect the value creation process (instead of the revenue-based key).
This formulation of the basic elements of the definition of the method is intended to give taxpayers an indication that different indicators relating to costs or revenues, as well as to assets, capital, revenue elements, can be used – it is essential that the database reflects the specificity of the transaction and industry.
Options were also identified in which the marketability of transactions could be examined.
These may be:
- • an internal reference to the performance of the entity in comparable transactions (the same base);
- • an external reference to the results of comparable transactions between unrelated parties (a comparable base);
- • an external reference to the performance of entities that conduct activities comparable to the transaction under consideration (a comparable basis).
New regulations explicitly allow application sixth option – the so-called ‘other method’, which may be the valuation technique. The Regulation provides guidance on how such a method should be applied. Among other things, it has been specified that, in case forecasts need to be used, these should be used for financial planning purposes.
No legally binding valuation technique has been defined, but the justification indicates (following the work of the OECD and the EU Joint Transfer Pricing Forum) that income methods based on discounting future economic benefits and cost methods are particularly useful for transfer pricing.
Changes in restructuring
A new definition of restructuring has been proposed, according to which this is a significant change in commercial and financial relations, including the termination of contracts or changes in their material conditions, entailing the transfer between associated entities of functions, assets or risk categories if, as a result of this transfer, the expected annual EBIT financial result in 3-the summer period after that transfer would change by at least 20%.
The restructuring chapter explicitly states that when examining restructuring events, it is necessary to examine the appropriateness of the introduction and the amount of remuneration paid in connection with the restructuring, thus providing for the possibility of introducing the so-called ‘exit fee’. Time and Time first Polish legislation also sets out the stages of the study of comparability in the case of restructuring.
Author
Leszek Dutkiewicz
Partner at Russell Bedford. From 2011 related to Russell Bedford Poland. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services. He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices.
Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.