Comparative analysis as part of tax documentation of transfer prices in Polish law

For a long time, the comparative analysis as part of the transfer pricing tax documentation has been defined in different ways and continues to define, using terms such as ‘comparison study’, ‘comparability study’, ‘benchmarking study/benchmarking analysis’ or simply ‘benchmark’.

At one time this analysis was omitted – probably because it was not compulsory – and it is now of great importance as one of the mandatory parts of this documentation. The author discusses in this article the evolution of this analysis in Polish law, which has occurred over the last few years.

1. What is comparative analysis?

For some time, comparative analysis was a very underestimated element of the transfer pricing tax documentation. Suffice to mention that to 2013 Polish legislation did not even contain regulations on the methodology of drawing it up.

This only changed the Regulation of the Minister of Finance from 17 June 2013, amending the Regulation on how and how to determine corporate income by estimation and how and how to eliminate double corporate taxation in the event of adjustment of profits of related entities 1 (hereinafter referred to as: the Regulation amending the Regulation from 2009) 2 ; The methodology contained in these provisions will be discussed further.

The definition of this analysis was introduced by the above-mentioned Regulation amending the Regulation from 2009 and reads as follows: ‘Determining the income of the related entity by way of an estimate precedes the tax authorities and tax authorities carrying out an analysis of the conditions laid down between the related entities and examining the compatibility of those conditions with the conditions which would have been determined by independent entities, or conditions which would have been determined by the relevant entity with the independent entity in comparable circumstances of the case, hereinafter referred to as ‘the comparability analysis’ 3 .

In addition, in accordance with the provisions applicable to 2016 In addition, the comparative analysis (or ‘comparability analysis’) was not a required element of the transfer pricing tax documentation. The situation has changed.

In 2017, when changes to the Act from 15 February 1992 on corporate income tax 4 (Next: the Corporate Income Tax Act). Since then, analysis has been listed as one of the elements of tax documentation, and although mandatory this time, it is only subject to certain conditions).

According to Article 9a(2b)(2) the Corporate Income Tax Act 5 : „Tax records shall include: (...) in the case of taxable persons: (a) whose revenues or costs, under the accounting rules established on the basis of the accounts kept, exceeded the equivalent in the year preceding the tax year 10,000,000 EUR or (b) having an interest in a company which is not a legal person whose income or costs, within the meaning of its accounting rules, as established on the basis of the accounts, exceeded in the previous financial year within the meaning of those provisions the equivalent 10,000,000 EUR – except the description in question Under point 1 6 , also a description of the analysis of the data of the independent entities or the data established with the independent entity, considered comparable to those of the transactions or other events in question Under section 1, hereinafter referred to as ‘the analysis of the comparative data’ used for the calculation of the accounts in question Under point 1 point (e) 7 , together with the source of these data.

If the taxpayer fulfils the conditions set out above, it must attach to the tax records a comparative data analysis.

By simplifying this definition, the analysis is a description of the data on the terms of the transactions concluded with an independent entity or concluded between independent entities comparable to the terms of the transactions established between the taxpayer and the associated entity.

On the other hand, even more briefly: this analysis is intended to prove that the price set between related parties has been set at market level. As Dr.

Danuta Langer-Babich rightly points out: “In the light of the above, this conceptual category includes conditions (in particular financial) for transactions or other events that have been established or that would have been established... between independent entities, indicating their market nature.

These, according to the concept, should determine the accepted transfer price in transactions or other events covered by the documentation obligation, instead of the frequently assigned control function, as a consequence of the ex post benchmarking.

In addition, settlements for the above transactions or other events must be due to the tax result (income or loss) of the taxpayer’ 8 . Therefore, the taxpayer is not obliged to provide an analysis of comparative data for transactions or other tax-neutral events.

According to the new ones, i.e. in force since January 2019, regulation, benchmarking is also an integral part of the transfer pricing tax documentation. However, this time it does not require additional conditions.

According to Article 11q(1)(3) (a) the Corporate Income Tax Act 9 : „The local transfer pricing documentation shall contain the following elements: (...) 3) the analysis of transfer prices, including: (a) the analysis of the data of unrelated parties or transactions concluded with unrelated parties or between unrelated parties considered comparable to those established in controlled transactions, hereinafter referred to as ‘comparative analysis’ ....

In considering the above definitions contained in the legislation over the years and comparing them, it can be concluded that they were not subject to drastic changes in the purpose of the analysis itself to determine whether the price in the transaction between related parties was set at market level, i.e.

one that would identify independent entities among themselves.

2. Comparative analysis elements

In the Regulation amending the Regulation from 2009 the components of the comparative analysis are not mentioned directly, but it has introduced something equally useful, i.e. seven the steps to be taken during the benchmarking. These are the following phases:

1. An overall analysis of the information relating to the taxpayer and his business environment,
2. Analysis of the conditions established or imposed between related parties, in particular on the basis of their functions, the assets involved and the risks incurred, as a result of which economic factors relevant to the circumstances of the case should be identified,
3. To verify whether it is possible to compare the conditions established or imposed between entities associated with the conditions applied by the entity concerned with independent entities,
4. Identification and verification of comparable conditions established by independent entities,
5. The choice of the most appropriate method in the circumstances of the case and then the necessity of applying the profitability indicator and the choice of its type appropriate to the method,
6. Identification of comparative data for the selected method on the basis of economically relevant factors and determination of the need for amendments,
7. Analysis of the comparative data obtained[10].

Step first was perhaps the simplest to realize. Where the taxable person had already held a tax record for the transfer prices, it was sufficient only to use the description of the taxable person included therein.

Such a description should include mainly information on the activities carried out by the taxpayer, the description of the market in which it operates and its position in that market. In turn, to do well second, ‘Such a description of the transaction is needed to identify those listed in the legislation five factors of comparability.

(...) As with general information about the taxpayer and its surroundings, the information contained in the transfer pricing documentation for the transaction under consideration can also be used for the analysis of the terms of the transaction.’ 11 .

The above mentioned factors of comparability are Under section 6 section 3 Regulations of the Minister of Finance from 2009

Step third is, in simplification, a check of the possibility of using the so-called internal comparison in a given analysis. This involves examining whether the taxable person contains with independent entities (i.e.

non-related entities) analogous transactions which it enters into with the related entity/entities and, if so, whether it also contains them under similar conditions and at the same price.

The internal comparison, if it can be applied, is helpful in that it allows without major problems to prove the marketability of transactions by the taxpayer, both related and independent entities.

Step fourth the identification and verification of comparable conditions established by unrelated parties. ‘It is appropriate to consider that at this stage of the preparation of the benchmarking analysis it is necessary to establish criteria that will assist in the search for comparative data.

In other words, a taxable person who has properly analysed his transaction (taking into account factors of comparability (...) should prepare a list of the most key terms of transaction as guidelines for the selection of comparative data" 12 . Step fifth is the choice of price method.

Fine, proper implementation of the previous steps was helpful in selecting one of five methods 13 to determine whether the transaction was market-oriented. The choice of the appropriate method should be well thought out and must not be free, especially since certain types of transactions do not allow certain methods to be used.

Step sixth is primarily about collecting comparative data. This is so much simpler that the analysis should use publicly available data. This allows the taxpayer to draw information from databases containing financial data of competitors, from various publications or industry reports. All the above steps lead us to seventh And the last, i.e. analysis of the comparative data obtained.

As mentioned above, introduced In 2013 the provision was helpful in applying the benchmarking. In September 2017, through the Regulation of the Minister of Development and Finance from 12 September 2017 on the information contained in the corporate tax documentation 14 (Further: Implementing Regulation with 2017) a provision has also been introduced establishing what kind of information a comparative analysis should contain. In accordance with that Regulation, this was information concerning:

1. Parties to a transaction or other event that are subject to benchmarking and, where required by the method of income calculation (losses) — two or more transaction or other event pages, together with an explanation of the reasons for selecting the transaction or other event concerned,
2. The assumptions underlying the analysis of comparative data which affect the market value of the subject-matter of the transaction or other event, together with the justification of the reasons for the recognition that the choice allows the highest comparability of transactions or other events on the basis of the available data and information, in the scope of: 2a. characteristics of goods, services or other benefits which are the subject of comparable transactions or other events, 2b. course of transaction or other event, including functional analysis, 2c. conditions specified in the comparative transactions or other events, 2d. conditions existing in the compared markets, including criteria of comparability affecting the recognition of the geographical, national or foreign area concerned, as a comparable market, 2e. economic strategy applied,
3. Reasons for using comparative data from one year or multiannual data used for analysing the economic situation of independent entities considered comparable,
4. Comparative data, including financial data or financial indicators, relating to economic operations with independent entities or concluded between independent entities which the taxpayer used to use the income calculation method (losses) or which he rejected due to lack of comparability, including information on the source and method of obtaining such data and on the prices or financial indicators relating to those transactions or other events,
5. The adjustments applied, together with the justification for their necessity, to eliminate discrepancies between the comparative data used for transactions, other events or entities and the transaction or other event analysed,
6. A designated market point or range, together with a description of the possible use of statistical measurements for that purpose, together with a justification for accepting that the terms of the transaction or other event do not differ from those which would have been determined by independent entities,
7. Reasons for missing any of the information indicated points 2 and 6 – where the analysis of comparative data does not require the possession or use of such data[15].

In addition to the minor differences (although the lack of any of the above information) the above elements of the comparative analysis do not differ significantly from the analysis steps which were in force to 2017 Less than a year and a half later, new legislation was introduced. On 1 January 2019 entered into force Regulation of the Minister of Finance of 21 December 2018 on corporate tax transfer pricing documentation (hereinafter: Implementing Regulation with 2019). According to the latest legislation, benchmarking should include:

• 1. Method indication 16 used to verify the transfer price, together with a brief justification for the choice,
• 2. Indication of the party or transaction to be examined in the transfer pricing analysis, if this results from the chosen method, together with a justification for the choice,

1. Description of the comparative analysis carried out using the selected one according to point 1 methods, containing:

3a. a description of the search and selection process and an indication of the sources of the data, together with a justification for the selection of the search criteria and the relevant assumptions adopted for this analysis,

3b. Comparative data presented in an electronic form enabling them to be edited, grouped, sorted and verified, including financial indicators, accepted and rejected in this analysis, together with their description, relating to transactions entered into by an entity related to an unrelated (internal) entity or between unrelated (external) entities, where available,

3c. justification for the reasons for accepting data for this analysis from many years or from one year,

3d. justification for the choice of the financial indicator adopted for that analysis, if applied,

3e. a description of the correction of comparability and the justification, if applicable,

3f. an indication of the point or range designated as a result of this analysis, together with a description of the statistical measurements, if used,

1. Description of the conformity analysis if no comparative analysis description is drawn up 17 ,
2. Reference of the transfer price to the result of the analysis (i.e. Comparative or compliance) with justification for deviations, if any[18].

As can be seen, the above elements have not changed significantly compared to those mentioned in the Implementing Regulation. 2017

3. Summary

Comparative analysis is according to the author one with key, right next to functional analysis, elements of tax transfer pricing documentation.

This is primarily due to its function, i.e. proof that the transaction between related parties was concluded at market level.

Although its key elements have not changed over the years, it can be concluded that it has passed into the Polish almost specific path – from the element of optional tax documentation, by being one from mandatory components (provided that appropriate conditions are met) to the present condition, when it is already a fully mandatory part of the tax documentation.

The article shows changes in the comparative analysis that have taken place in recent years, pointing out that its correct production constitutes an important added value as part of the tax documentation.

Indeed, the comparative analysis is primarily aimed at making the transaction similar, namely showing that it was concluded in accordance with the arm’s lenght principle.

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