After two years after the introduction of significant changes to transfer pricing rules, starting with 2019 another amendment has entered into force, which also significantly, although not so revolutionary, affects how taxpayers are to carry out their obligations in relation to transactions with associated entities.
At the moment – at the end of the year 2019 We already know information from taxpayers indicating what aspects of the new legislation are of greatest doubt. Also available first decisions of the authorities and courts on the basis of a new legal status.
Year 2019 is for most taxpayers first period for which the most recent amendments are applicable, due to 9-a monthly deadline for drawing up tax records means that in many cases documentation and reporting obligations will be implemented on a new basis for the time being. first In 2020, for the year ended 2019.
This means that taxpayers subject to transfer pricing obligations are faced with the need to pass a practical test of their ability to deal with the new requirements imposed by the legislator.
The proper implementation of these obligations requires those involved in documenting and reporting not only the substantive knowledge of the rules but also some experience and intuition in terms of transfer pricing as well as (and perhaps above all) an excellent knowledge of the reality of the entity or group of entities they work for.
The following are key issues at the turn of the year: 2019 and 2020 attracts the greatest interest in the practice of carrying out transfer pricing obligations.
New way of identifying related entities
A new way of defining related parties was proposed by the concept of having a significant impact on another entity. At the same time, under the concept of significant influence, both the existing links by holding a share of capital (extended by holding voting rights in control bodies, which are or managers, interest in profits or assets or their exspects) and the management-control relationships have been clearly identified, as well as the provision that the existence of the link is determined by the actual ability of a natural person to have an influence on the entity's key decisions.
Impact on taxpayers
The new definition is much wider and I think it is still out of focus. Some questionable issues have been sorted out, inter alia, regarding indirect links.
If entity A holds shares in Sub-item B, which holds shares in C, which in turn holds shares in subsequent units, etc., then the wording of the new provisions as long as the condition of having a significant influence is met (e.g.
25% the participation), regardless of the number of subsequent subsidiaries (other levels of dependency), those entities are related entities. This means examining indirect links at multiple levels/levels in the structure of a group of related entities, regardless of the so-called "deepness of the structure".
The obligation to carefully examine indirect links is particularly burdensome from the perspective of Polish local companies operating in large international groups, which do not have access to information about links at higher levels of the group structure
In practice, there may be situations where taxpayers deal with entities that are unaware that at some level of the structure the conditions for establishing an indirect link have been met.
Our practice shows that such situations have already occurred under previous regulations, so in the light of these current ones they can be even more common.
The obligation to carefully examine indirect links is particularly burdensome from the perspective of Polish local companies operating in large international groups, which do not have access to information about the links at higher levels of the group's structure, because this is often the policy of managing capital groups (which is understandable from the point of view of the necessity of maintaining commercial secrecy and competitiveness of the group as a whole).
A far-reaching change to the conclusion that the relationship is also an aspect of having a right to participate in profit means that such a condition is formally fulfilled, for example, as soon as the parties concerned agree on a draft partnership agreement.
Due to this change in approach to capital links, such links are also generated by units and investment certificates, which means that new regulations include FIZs, among others.
While remaining on the subject of links, the project also addressed the question of indirect link, indicating that such link would be created through one or more entities.
Moreover, the new rules also apply to situations where there would be a relationship between operators "not established or maintained for legitimate economic reasons, including the purpose of manipulating the ownership structure ...".
In such cases, tax authorities may find that there are links, which means that, for example, when a Polish distributor cooperates with a related German entity, which imports goods from a Hong Kong company (formally unrelated) and in the framework of permanent cooperation it mediates imports of goods (e.g.
clothing, electronics) into a Polish company, tax authorities have the opportunity to establish a link between a Polish company and a Hong Kong unit.
New way of identifying transactions subject to a documentation obligation
In accordance with the provisions applicable to the 2019, the determination of the transactions for which the local documentation is to be drawn up will be based on an examination of the value of the transaction between related parties that should be classified as one of the categories of transactions defined by the legislator. Proposed 2 the materiality thresholds:
- • 10,000,000 PLN - for commodity and financial transactions
- • 2,000,000 PLN – for service and other transactions.
The thresholds above should be set individually for sales and purchases.
Impact on taxpayers
The deviation from the entity-cost criterion (as applied in years) should be positively assessed 2017-2018, as well as the increase in documentation thresholds. The expression of their value in the net currency of PLN also contributes to simplifying the procedure in the case of identification of transactions subject to the documentation obligation.
For the purposes of setting the threshold for financial transactions, it is clear that the threshold 2,000,000 PLN the value of the financing (i.e. the value of the capital provided in the case of loans) or the value of the guarantee sum in the case of guarantees/guarantee transactions.
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It is provided that, when determining the value of transactions, account should be taken together of the value of all homogeneous transactions, regardless of the number of accounting documents, payments made and the number of connected entities with which the transaction is carried out. The examination should be carried out in succession on the basis of invoices, where the invoices are missing, on the basis of contracts or other documents, and in the final instance on the basis of payments made.
As indicated in the explanatory memorandum of the draft, the thresholds are set separately for each transaction controlled under each category — meaning that within the one the categories will be allowed to group into types of transactions. Consequently, the values of the various transactions controlled under the one the categories should be referred separately to the threshold indicated for the category of transactions concerned.
The new rules have not removed most of the doubts about the grouping of transactions. It is still necessary to carry out a substantive transaction analysis in order to determine whether there is a homogeneous transaction and then to determine whether and to which group of transactions this specific transaction belongs. A broad discussion on this subject and possibly further official interpretations are expected.
Exclusion of the obligation to document domestic transactions
The legislator introduced the principle that they would not be subject to a documentation obligation for transactions carried out by national entities, none of which incurred a tax loss (in a given year for which the documentation obligation is established), none of which benefited from a reduction in activities carried out in a special economic zone or from reductions provided for by the State Treasury, NBP, budget units.
Impact on taxpayers
The need for such a change has been advocated for many years, and it should be assessed as positively as possible. However, the practical application of this provision beneficial to taxpayers faces some difficulties in determining whether the conditions for the exemption have been met.
The basic issue is that, since none of the entities involved in the controlled transaction, executed, inter inter alia, on the basis of one contract, cannot suffer loss; the situation when 5 entities jointly implement the transaction and 4 of which they achieved income and one loss. The literal wording of that provision means that the loss of one of the entities involved in such a joint transaction exclude the possibility to benefit from the exemption.
A separate consideration should be given to the situation where a homogeneous transaction is carried out with a number of connected entities that are not parties to the controlled transaction. In the above case, if the transaction controlled only from one of the national related entities does not meet the conditions listed in Article 11n(1) point c updop, the obligation to draw up a local transfer pricing documentation will occur only for that transaction with that related entity.
The same should be considered if the conditions referred to in Article 11n Updop, by an entity in a group of connected entities that is not a party to a controlled transaction. The examination of the obligation to draw up transfer pricing documentation should then take place for those entities that are party to the controlled transaction. This is due to the interpretation of the Director of National Tax Information at 7 October 2019 The signal. 0111-KDIB1-3.4010.341.2019.1.APO.
Furthermore, it should be noted that there is no obligation to draw up the transfer pricing documentation referred to in Article 11n(1) point c updop should be determined on the basis of the loss from the source of revenue to which the transaction subject to that obligation belongs. If the transaction concerns a particular source of revenue, it should be examined whether the taxpayer has suffered a loss only from that source. At the same time, the loss from another revenue source is irrelevant in this situation.
Simplified forms, so-called 'safe harpours'
After further discussions, the legislator decided to introduce solutions in which the taxpayer, after complying with the proposed remuneration framework, would be sure that the tax authority would not assess the market value. These Safe Harbour solutions apply to 2 types of transactions:
After first in the case of loan transactions, it is provided that the Minister responsible for public finance will publish a notice containing the types of base rate and margins. If, in a loan transaction with a related entity, the taxpayer applies this level of interest, with the sole form of remuneration, the loan will be granted for a maximum period of time 5 years, the total value of liabilities or loans receivables will be no more than 20,000,000 PLN and the loan does not come from a tax haven, the taxpayer can ensure that the tax authority does not verify its loan agreements.
Under the new comprehensive regulation, taxpayers will be required to submit a new type of report – information on the TP-R transfer prices. Work on the right content is underway
In the case of low value added services transactions, the tax authority will not verify the amount of the charge at all if it is not more than 5% costs, provided that the calculation is done by cost plus or MTN, the recipient will have a complete calculation of generic costs and a description of how the allocation keys are used (for all related entities using the service).
Impact on taxpayers
The so-called Safe Harbour solutions can undoubtedly benefit taxpayers. first the notice on loan transactions was issued by MF at the end 2018 and indicates as a base interest rate 3-monthly WIBOR, EURIBOR or LIBOR and margin at 2%.
In applying this simplification, it should be noted that on no date of the tax year the total value of the debt or borrowing receivables with related entities must not exceed the equivalent 20,000,000 PLN.
It is also worth mentioning that the data from the MF Notice cannot be used as comparative data to carry out comparative analyses in other loans between related entities.
New report - TP-R
Under the new comprehensive regulation, taxpayers will be required to submit a new type of report – information on the TP-R transfer prices. Work is ongoing on developing the right content. On the basis of the Transfer Price Information Regulation and the published TP-R projects, it can be seen how detailed information is expected from KAS taxpayers as part of new transfer pricing information.
Impact on taxpayers
New transfer pricing information (TP-R) will be submitted once first for 2019 (tax year starting after 31 December 2018) year 2020. At present, we are not yet sure what its final shape will be, the draft that has been submitted for consultation is known. In a year 2018 until the end of September 2019 taxpayers were obliged to submit CIT-TP or PIT-TP, in accordance with the conditions arising from the provisions in force to the end 2018 (no matter what regime they chose to document transactions for 2018).
Declaration of the drawing-up of dossiers — as regards 2018 in this respect, decision-making was still on the part of the taxpayer:
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- if the taxpayer has decided to document transactions carried out in the year 2018 according to ‘old’ rules (current in years) 2017-2018, it makes a statement in its present form, i.e. a statement of the drawing up of documents sent in paper form;
- •
if the taxpayer has decided to apply ‘new’ rules to document transactions in 2018, the statement will be made in accordance with the provision Article 11m, and thus confirming not only the fact that the local tax documentation was drawn up, but also that the transactions covered by this documentation were carried out at market conditions.
In practice, there have been cases where taxpayers did not decide to apply the new rules of documentation only because they did not need to make a new, extended declaration.
With respect to 2019 all taxpayers concerned by this obligation shall make a statement on new rules.
Information on transfer prices in CIT-8 – declaration CIT-8 submitted for the tax year 2018 has not been adapted to those transitional provisions enabling taxable persons to document transactions in 2018. Questions about the documentation obligation (entry) 26 They referred to ‘old’ provisions, i.e.
Article 9a(1)(1) The CIT Act, and did not contain any reference to ‘new’ regulations. Consequently, the taxable person who decided to document transactions carried out in 2018 according to ‘new’ rules, there is no possibility to provide an answer that is entirely in line with the existing factual and legal situation.
In reply to the question of what the taxpayer should do in this problematic situation, MF merely pointed out that, in fact, the declarations CIT-8 they have not been technically adapted to a solution allowed by transitional provisions, but from the perspective of the tax administration the problem is not so pressing as tax authorities will learn about the rigor chosen by the taxpayer on the basis of the submissions made on the preparation of the documentation.
Many taxpayers have already decided how to answer this question – with one of the parties appearing that since the question in the declaration refers to a provision in force until the end 2018, this in replying to them should have been assessed from the perspective of these provisions, from second parties in a situation where, according to the ‘old’ rules, the taxpayer was obliged to draw up documentation, but benefited from the rules applicable from 2019 and on its basis had no documentation obligations, that meant that in the declaration CIT-8 may have ‘legally’ indicated that he had an obligation to draw up the dossier and subsequently also not to draw up it under the law.
According to the Regulation of the Minister of Finance, Investment and Development from 14 November 2019 on the definition of corporate income tax templates (Journal of Laws of 2019, item 2337), which entered into force on the day 1 December 2019, New corporate tax income tax (CIT) declarations — including CIT-8 (version No 28), adapted to statutory changes with 1 January 2019
Author: Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. 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.