Draft new solutions for resolving double taxation disputes and prior price agreements

In March 2019 The Ministry of Finance presented a new bill [1], the aim of which is to systematise double taxation dispute resolution measures in the EU, eliminate double taxation by correcting the profits of related parties, apply the mutual agreement procedure under such taxation agreements.

The project also includes rules on the conclusion of price agreements.

In the article, the author discusses a new double taxation dispute resolution mechanism, which includes action on the initiative of the taxpayer and provisions on advance pricing arrangements (APAs), particularly concerning a new solution in the Polish system, which is to be able to conclude such an agreement in a simplified procedure.

In May 2019 an ongoing public consultation of the above-mentioned bill, and the following study presents important issues from the point of view of the Polish taxpayer.

The reading of the bill commented leaves contradictory impressions – some of the solutions which have been covered by the project are certainly expected by taxpayers (although they are granted a tool in the form of the possibility of submitting a request for settlement of the dispute or the possibility of obtaining a prior price agreement), and some of the parties to the project raise concerns, in particular as to the way in which the legislative action is carried out hastily without ensuring adequate consistency with other existing legislation, in particular in the case of the implementation of Community legislation, which in many cases boils down to the introduction of the "kalka" provisions of the relevant directive, which have been translated into Polish [2], and the envisaged scope of application of the tools (e.g.

a very limited list of situations that may be the subject of a request for a simplified price agreement). Project coverage one a legislative act of all the above-mentioned issues is not an easy task, but this idea can be considered to be quite a hit, as it aims to systematise the solutions envisaged for the elimination of double taxation.

There is no doubt that the way in which this idea is implemented needs improvement.

The reading of the bill commented on leaves contradictory impressions – with one party to the solutions covered by the project are certainly expected by taxpayers, and the proposal raises concerns, in particular as to the way in which legislative action is carried out hastily without ensuring appropriate consistency with other existing legislation

The new solution provided for in the draft law is to regulate double taxation dispute resolution measures in the European Union – in this respect, implementation Directive 2017/1852 to 10 October 2017 on double taxation dispute resolution mechanisms in the European Union [3] (hereinafter: ‘Directive 2017/1852”). The Council adopted this Directive as a growing number of disputes concerning the interpretation and application of bilateral double taxation agreements were noted.

In addition to the need to implement the Directive, which is directly due to its provisions (the deadline is set to 30 June 2019) The aim of the bill is to harmonise procedures for the elimination of double taxation which are carried out outside the mechanisms provided for in the double taxation agreements.

The draft law envisages the transfer of existing regulations on the correction of income of the taxpayer recognised by the tax administration of another State as income of a related entity outside Poland, from income tax laws to one, new legislation (current provisions) Article 23t Act on 26 July 1991 on personal income tax [4] and Article 11h Act on 15 February 1992 on corporate income tax [5]).

In addition, the proposed law is designed to transfer to the content of the new normative act of the existing regulations (Agreement on the settlement of transaction prices) contained in Section IIA of the Act from 29 August 1997 - Tax Ordinance [6] and complement the existing rules with the possibility of simplified price agreements.

Implementation Directive 2017/1852 – new solutions in the Polish tax law system

Directive 2017/1852 aims to lay down rules on dispute settlement between Member States concerning the interpretation and application of agreements and conventions governing the elimination of double taxation of income and, in certain cases, capital.

Directive 2017/1852 is to apply to all taxable persons subject to tax on income taxes and capital taxes.

one of assumptions Directive 2017/1852 it is the settlement of disputes concerning different interpretations, the different application of bilateral tax agreements and conventions and the Union Arbitration Convention by means of an agreed, uniform procedure which will start from the submission of the case to the tax authorities of the Member States concerned.

It was indicated that, following such notification, Member States should First, use non-binding forms of out-of-court dispute resolution. A more formalised procedure should be applied when such conciliation fails to reach an agreement.

The role of the investigating authority would then be taken over by an advisory committee (or an out-of-court dispute resolution committee).

A new, streamlined dispute resolution mechanism should be based on existing systems in the EU, including the EU Arbitration Convention, but the authors' founding Directive 2017/1852 is to develop a mechanism wider than the scope of the Convention.

The focus of this Directive is also on the efficiency and duration of the dispute settlement process – this Directive makes clear recommendations on how to limit the duration of these procedures.

To achieve the objectives Directive 2017/1852 there is a dispute resolution procedure which will be initiated on the initiative of the taxpayer as a result of a complaint brought by him [7]. In principle, a complaint should be lodged within the time limit 3 years after receipt first a notice of action resulting in a disputed matter — a taxpayer interested in resolving the dispute should ensure that his complaint is brought to each Member State (exceptions have been introduced for natural or non-large persons not forming part of a large group).

The Member States' authorities shall be able to verify the formal and substantive complaint received, which should, however, last no longer than 6 months.

After this period, a decision should be taken to reject the complaint (due to the lack of information as formal elements of the complaint, where it is found that the dispute does not exist or where a three-year period has not been observed) or to adopt it, together with an indication of how they intend to resolve the dispute, unilaterally, without involving other competent authorities of the Member States or in the framework of a mutual communication procedure.

Where an attempt is made to resolve the dispute by means of that procedure, Member States shall be obliged to seek to resolve the dispute within the 2 years after the last notification of acceptance of the complaint by the Member States.

Directive 2017/1852 provides for a fairly specific model of ‘return proceedings’ to be carried out in cases where, by means of mutual communication, the competent authorities of the Member States would not be able to reach agreement or where the complaint would be rejected by one of the competent authorities of the Member States (this does not apply where all the competent authorities of the Member States would reject the complaint in accordance with the complaint).

In such cases, at the request of the person whose initiative was the reason for the initiation of the dispute settlement procedure, Member States may establish a dedicated advisory committee or an out-of-court dispute resolution committee to identify how the dispute is to be resolved.

The Advisory Commission should at least be composed of one person representing each competent authority of the Member State involved in the dispute, at least one a person of general trust.

Some controversy may be raised by the way in which the "people of general recognition" are reported and selected – detailed rules are to be agreed between the competent authorities of the Member States concerned.

The Directive contains only a list of contraindications for the appointment of a person for that role (which concern only the need to maintain independence by that person).

Each Member State should also keep a list of persons of general recognition, at least on this ‘list’ 3 persons who are "competent and independent and who can act impartially and honestly" (Article 9 Directive 2017/1852).

The directive also provides for an alternative option to identify independent individuals of general trust by drawing if other ways prove ineffective.

The composition of the out-of-court dispute resolution committee is not as strict as that of the advisory committee, Directive 2017/1852 It also leaves some room for Member States to set up a standing committee as a committee.

It is highly likely that many Member States are willing to take advantage of this possibility, as this could be a simpler and cheaper solution for use from a country's point of view. The committee/committee should have an opinion on how to resolve the dispute.

To sum up this part, it should be pointed out that Directive 2017/1852 has left Member States a wide range of issues requiring their own legislative initiative to adapt their procedural requirements to the reality of the country's system.

This is the right assumption, since only if the mechanisms provided for in this Directive are implemented in a manner consistent with the local requirements of the Member States' administrations, this procedure has the opportunity to work effectively and effectively (e.g. Directive 2017/1852 does not indicate exactly what form the out-of-court dispute resolution committee should take).

In the meantime, the Polish legislator presented a project in which many provisions merely translate individual passages Directive 2017/1852, by transposing properly literal. Such implementation of this Directive results in far-reaching uncertainty as to how the dispute resolution mechanism will function in Poland [8].

The draft law in question contains provisions concerning the procedure for submitting an application for settlement of a disputed issue, which are a proper repetition of the provisions Directive 2017/1852 concerning the complaint; it is provided that the ‘competent national authority’ (which, as defined in the proposal, is to be the Minister responsible for public finances or its authorised representative – the project has not further clarified/adjusted this concept to the reality of the Polish administration) has 6 months to accept or reject the application (from the date of receipt or supplement it with additional information)[9]. In the event of rejection of the application, it is possible to bring an action before the competent national court (which is to be the administrative court) where the authorities of all the Member States concerned have rejected the application; the exact legal form in which the application is to be rejected is not specified; under Article 13(5) The project only indicated what elements should be included in the notice of rejection.

Further to the Polish bill, following the solutions described in Directive 2017/1852, Rules on dispute resolution were introduced by an advisory committee or an out-of-court dispute resolution committee. The Advisory Commission is to be set up ad hoc within 120 the days following receipt of the request for its establishment.

The procedure for setting up an advisory committee is also provided for if the committee is not set up within the specified time limit, the national appointing authority may appoint the members of the committee from the list of independent experts, the role of the national appointing authority is to be exercised by the Council for the prevention of tax avoidance.

The Advisory Commission should deliver its opinion to the competent authorities of the Member States concerned within a time limit 6 months from the date of the establishment of the committee, this period may be extended once more by a further period 3 months.

The provisions on the out-of-court dispute resolution committees are also a properly translated translation of the content of the individual articles Directive 2017/1852.

The reading of the bill leads to the conclusion that it lacks a thoughtful adjustment of the provisions Directive 2017/1852 to the functioning of administrative authorities and administrative courts in Poland, so it was right to point out to the NSA in its conclusion that "the project submitted should only be seen as a starting point for further legislative work".

New rules on prior price agreements and simplified price agreements

Another aspect to be highlighted in the context of this draft law is the issue of the APA – as mentioned earlier, the regulation boils down to the transfer of the existing rules contained in the IIA section (Transaction pricing arrangements) and to complement the existing rules with the possibility of simplified pricing agreements.

From the point of view of taxable persons operating in groups of related parties, it may seem particularly attractive to obtain a prior price agreement in a simplified procedure. Unfortunately, a simplified price agreement can only be issued for transactions concerning:

(a) services with low added value;

(b) to bear fees for the use or right to use a trade mark or knowledge/information constituting so-called know-how.

This is undoubtedly a very narrow subject matter which can be the subject of a simplified price agreement on the extent to which taxpayers would expect. A further serious limitation of the practical relevance of the simplified price agreement mechanism is the possibility for low value added service providers only to obtain it.[10].

Leaving the proposed provision as such will mean that there will be no possibility of obtaining a simplified price agreement for those Polish taxpayers who operate in capital groups and are providers of support/support services or make trademarks or know-how available.

In view of Poland's growing role on the international stage and the dynamic development of capital groups with management centres in Poland, this solution is harmful to Polish entrepreneurs who successfully develop their operations on foreign markets, and their management centre and profit centre are located in Poland.

As regards the provisions of Chapter 3 The draft law on simplified agreements indicated that a simplified agreement would not be possible for transactions completed before the date of the application, as well as in cases where the applicant's income share in revenues at least two tax years in the last period third tax years are lower than 1%. These limits are quite rational, with the requirement to maintain income participation at a level not lower than 1% should also concern first two the years for which the simplified agreement was issued.

As regards the procedure for obtaining a simplified price agreement, the changes are noticeable, the request for a simplified price agreement is to include: information on the controlled transaction (primarily a brief description of the need to enter into the transaction and an indication of the chosen method of verification of the transfer price, together with its calculation to be provided in an editable electronic form);

• statements of economic justification for a controlled transaction;

• a description of the economic benefits of the transaction;

• a comparative analysis either of the conformity analysis or a statement that the applicant uses a safe Harbour for services with low added value;
• a proposal for the duration of the simplified price agreement.

It was pointed out that a simplified price agreement could be issued for a period not exceeding 3 tax years, it may be renewed for a further three-year period (multiple) provided that the elements of the simplified price agreement have not changed significantly.

The procedure for a simplified price agreement should be completed within the 3 months after its initiation, the flat-rate fee is to be 20,000 PLN.

The shortening of the duration is therefore clear (although the wording of the provision leaves a margin – it was pointed out that the agreement should be issued without undue delay, no later than within 3 months).

The introduction of a proposal for a simplified price agreement to a limited extent will result in far less interest. This is a disappointment to the large expectations of taxpayers that have been sustained by the prolonged legislative work on the regulation of simplified price agreements.

The proposal is still in the legislative phase, so the possibility of further changes remains open. Unfortunately, the project concerns both price agreements and implementation Directive 2017/1852, the time limit must be respected (30 June 2019) the obligation to transpose the provisions of that Directive.

However, this time limit does not apply to provisions relating to prior price agreements, so it may be possible to regulate all these issues in one normative act, which is not the best solution and it would be worth considering the possibility of including the subject matter of prior price agreements in a separate legal act in order to provide a reasonable time for careful legislation.

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1 Draft law on 21 March 2019 on the settlement of disputes concerning double taxation and the conclusion of prior price agreements 22 March 2019 at the Government Legislative Centre; https://legislacja.rcl.gov.pl/docs//2/12321385/12578005/12578006/dokument386330.pdf 2 The National Chamber of Tax Advisors (KIDP) and the Supreme Administrative Court (NSA) expressed clear reservations in this respect.

In writing from 12 April 2019 KIDP indicated that the draft law amends the provisions which were the subject of the amendment which entered into force 1 January 2019, i.e.

in particular with regard to amendments Tax Ordinance and income tax legislation as a result of the implementation of the ATAD Directive (Directive 2016/1164 to 12 July 2016) date 1 July 2019 Further changes are planned, which will largely mean excluding “new” entries Tax Ordinance and their transfer to a separate law.

The KIDP also points out that the date of entry into force of the new law is not realistic, especially if the legislator wishes to ensure a complete legislative process, taking into account the time necessary for in-depth analysis and for the collection of opinions from all stakeholders.

KIDP also points out that the introduction of rules that may affect income taxation during the tax year raises doubts.

NSA in a letter from 15 April 2019 pointed out that "the model of implementation adopted in the draft Directive 2017/1852 raises significant doubts as to the appropriateness of the proposed implementation measures in the context of the functioning of the administrative judiciary.

The NSA also points out the lack of adaptation of the concepts used in the bill to the reality of the Polish legal order: (...) implementation Directive 2017/1852 should take into account the specificity of the Polish legal order, the most developed catalogue of legal forms of action of the administrative authorities (or entities acting as such) and the judicial control system based on it.

Projected implementation Directive 2017/1852 does not fully meet the standards set out therein.’ 3 Official Journal of the European Union L, No. 265 to 14 October 2017 [4] i.e. Journal of Laws of 2018, item 1509, as amended [5] i.e. Journal of Laws of 2018, item 1036, as amended [6] i.e. Journal of Laws of 2018, item 800, Continued at.p.

7 According to Article 3 Directive 2017/1852. 8 Second, Poland is not an exception – a similar way of "transpositioning" EU rules applies many Member States – in relation to Directive 2017/1852 The Republic of Cyprus, among others, introduced a fairly direct implementation. [9] Article 13 in conjunction with Article 3(5) draft bill.

10 This is due to the way the records are formulated Article 71(2) points (a) and (b) of the draft law, where the legislator used the words ‘purchase’ and ‘carrying’, which limits the entity to those taxable persons who pay or purchase services, and thus to the recipients.