Tax documentation of transfer prices in Polish law – elements of the document

Transfer prices have become a popular topic in recent years. The main reason for this was not only the increasing frequency of checks on transactions between related parties, but above all the major changes in the rules governing this issue.

In addition, these changes occurred in a relatively short period of time – first in 2017, followed by 2019. No wonder some taxpayers may feel a little confused about such a turn of events. The author in this article discusses issues related to elements of tax transfer pricing documentation over the years, i.e.

what such document should contain and what changes have been made in years 2017-2019.

1. Short coverage of related entities

Before discussing issues relating to the necessary content of the transfer pricing tax documentation, the question of who is obliged to draw it up should be answered. In simple terms, a transfer pricing tax record should be drawn up when related parties enter into a transaction between them (although not every transaction with a related party automatically requires such a document)[1]. In that case, an explanation needs to be given one question – when are we dealing with related entities?

In 2019 a major change in the definition of related entities has been introduced. To 1 January 2019 links between entities were regulated under Article 11 Act on 15 February 1992 on corporate income tax 2 (Next the Corporate Income Tax Act) and by analogy under Article 25 Act on 26 July 1991 on income tax on natural persons (hereinafter u.p.d.o.f.)[3].

According to Article 11(1) the Corporate Income Tax Act in the form before 2019:

If:

1. a natural person, a legal person or an organisational unit not having legal personality, having its domicile, seat or management in the territory of the Republic of Poland, hereinafter referred to as ‘national entity’, shall be directly or indirectly involved in the management of an undertaking located outside the territory of the Republic of Poland or in its control, or having a share in the capital of that undertaking, or
2. a natural person, a legal person or an organisational unit not having legal personality, domiciled, established or managed outside the territory of the Republic of Poland, hereinafter referred to as ‘foreign entity’, shall participate directly or indirectly in the management or control of the national entity, or have a share in the capital of that national entity, or
3. the same natural person, legal person or organisational unit not having legal personality simultaneously, directly or indirectly, participate in the management or control of the national and foreign entity, or have a share in the capital of those entities

• and if, as a result of such links, conditions are established or imposed which differ from those which would have been determined by independent entities, and as a result, the taxable person does not show income or shows income below those expected to exist, the income of the taxable person concerned and the tax due shall be determined without account being taken of the conditions resulting from those links.

section 2-3a the above article deals with methods of estimating income and the definition of related entities is continued Under section 4 and section 5. According to Article 11(4) the Corporate Income Tax Act:

Provisions section 1-3a shall apply mutatis mutandis where:

• 1) the national entity is directly or indirectly involved in the management or control of another national entity or has a share in the capital of another national entity, or
• 2) the same natural person, legal person or organisational unit not having legal personality simultaneously, directly or indirectly, participates in the management or control of national entities or has a share in the capital of those entities.

It should be mentioned that having a share in the capital of another entity referred to in the above provisions means a situation where the entity directly or indirectly holds a share in the capital of another entity not less than 25% (before the amendment In 2017 This share was only 5%).

In addition to these links, in the Corporate Income Tax Act there is also talk about family ties and employment relationships.

According to Article 11(5) the Corporate Income Tax Act: provisions section 4 it shall also apply to links of a family nature or a relationship of employment or property between national entities or persons exercising management or control or supervisory functions in those entities, and where any person combines management or control or supervisory functions in those entities.

In conclusion, the links between the entities ‘must be considered on several levels:

• • at national level (between entities established in Poland) and international (between entities established in the territory) two different countries),
• • due to the nature of the links — capital and personal,
• • because of the degree of link, for capital links as direct or indirect links and for personal links as functional or personal links.’ 4 .

As mentioned above, In 2019 serious changes have been made to the definition of related entities, including by introducing the concept of "substantial impact". Currently related entities are defined under Article 11a(1)(4) the Corporate Income Tax Act, according to which related entities are:

• 1. Entities one the entity has a significant influence on at least one another entity,
• 2. Entities significantly affected by the same other entity or spouse, relative or related to second the degree of natural person having a significant influence on at least one entity,
• 3. A company without legal personality and its associates,
• 4. The taxpayer and its foreign establishment and, in the case of a tax group, the capital company which is part of it and its foreign establishment.

The above explanation seems simple, but it is necessary to clarify the significant impact. This in turn is the definition under Article 11(2) the Corporate Income Tax Act According to that provision: by exerting significant influence over the provision in question Under section 1 point 4 point (a) and b, is understood as:

1) possession directly or indirectly at least 25%:

(a) shares in capital or

(b) voting rights in control bodies, acting as or managing bodies, or

(c) shares or rights of participation in profits or assets or their equivalents, including units and investment certificates, or

1. the actual ability of a natural person to influence key business decisions by a legal person or an organisational entity without legal personality, or
2. being married or having a relationship or affinity for second grade.

In summary, the above changes must be concluded that the links are recognised:

• • because of its significant impact, it is the most extensive and detailed category, including both capital and personal links,
• • because of the level of relationship between the passenger company and its partner,
• • in view of the level of relationship between the taxpayer and his foreign establishment[5].
• 2. Elements of transfer pricing tax documentation according to the provisions applicable to 2019

With regard to elements of the transfer pricing tax documentation, although first the transfer pricing provision has already appeared in the Corporate Income Tax Act from 1992 6 , This designation of the elements and contents of the transfer pricing tax documentation and the obligation to draw up it has only been introduced In 2001 Article 9a(1) the Corporate Income Tax Act valid, with slight changes, until the end 2016 Until then, taxpayers had to draw up transfer pricing tax records which should include:

• 1. Determination of the functions performed by related entities involved in the transaction (including assets used and risks undertaken).
• 2. Determination of all anticipated transaction costs and form and date of payment.
• 3. Method and method of calculating profits and determining the price of the transaction.
• 4. Identification of an economic strategy and other actions within it, where the value of the transaction has been affected by the strategy adopted by the entity.
• 5. Indication of other factors where the above factors are taken into account to determine the value of the transaction by the entities involved in the transaction.
• 6. Determination of the benefits expected by the entity obliged to prepare the documentation for benefits in the case of intangible services contracts (including services).

As it is rightly noted, "some of the elements of the documentation may be omitted if they do not affect the transaction recorded or because of its nature. Such elements are the economic strategy and the identification of other factors related to the transaction.

When preparing the documentation, it should also be borne in mind that in the case of documents relating to intangible transactions, it is necessary to indicate the benefits that entities have to bear with them." 7 . From 2017 quite extensive changes in transfer pricing legislation have been introduced.

The taxpayer (subject to certain requirements) was obliged to prepare third types of documents, i.e. local documentation (Local File), group documentation (Master File), country-by-country reporting.

According to Article 9a(2b) the Corporate Income Tax Act, according to legal status for years 2017-2018, the local tax record of transfer prices should contain the following information:

1) description of the transactions or other events in question Under section 1, including liquidity management contracts, cost-sharing agreements between the taxpayer and in the case in question Under section 1f – a company which is not a legal person and its related entities, containing:

• (a) an indication of the nature and subject matter of those transactions or other events,
• (b) financial data, including cash flows relating to these transactions or other events,
• (c) the identity of the related parties involved in or who are attracted to those transactions,

(d) a description of the course of those transactions or other events, including the functions performed by the taxable person and in the case in question Under section 1f – a company which is not a legal person, and its affiliates, the carrying out of their balance sheet and off-balance sheet assets, human capital and risks incurred,

(e) an indication of the method and method of calculating the taxpayer's income (loss) with the justification for their choice, including the accounting algorithm for those transactions or other events, and the calculation of the value of the accounts affecting the taxpayer's income (loss) and in the case in question Under section 1f – also other shareholders of a company which is not a legal person;(...) 8 ;

1. a description of the financial data of the taxable person and in the case in question Under section 1f – a company that is not a legal person, allowing comparison of the accounts in question Under point 1 point (e), the data resulting from the approved financial statements, if the obligation to draw it up derives from the accounting rules applicable to the taxpayer or company;
2. information on the taxable person and in the case referred to Under section 1f – a company not a legal person including a description of:

(a) the organisational and management structure,

(b) the subject matter and scope of the activities carried out,

(c) the economic strategy pursued, including those carried out in the tax year or in the year preceding the tax year of transfers between connected entities of economically significant functions, assets or risks affecting the taxpayer's income (loss);

(d) a competitive environment;

5) documents, in particular:

(a) agreements, agreements concluded between related parties or other documents concerning transactions or other events in question Under section 1, an agreement of a company that is not a legal person, a joint venture agreement or similar agreement, documenting the rules for granting shareholders' rights to participate in profit and loss,

(b) income tax agreements concluded with tax administrations of countries other than the Republic of Poland concerning transactions or other events in question Under section 1, in particular, prior price agreements.

This list of elements is further detailed in the Regulation of the Minister of Development and Finance from 12 September 2017 on the information contained in the corporate tax documentation[9]. According to section 3, point 1-3 of that Regulation, the descriptions mentioned under Article 9a(2b) the Corporate Income Tax Act include:

1) for financial data, including cash flows relating to transactions and other events in question under Article 9a(2b)(1) point (b) the laws, information presented separately for each activity, broken down by non-State countries or territories and by related entities concerned by the transaction or other event, concerning:

• (a) the value of transactions or other events in a given tax year resulting from invoices issued or received and, if invoices are not issued or received, from contracts or other documents,
• (b) payments received or transmitted relating to those transactions or events;

2) for data identifying the related entities concerned under Article 9a(2b)(1) point (c) Act:

• (a) the names of the affiliated entities, together with information on the legal form of the business,
• (b) the address of the related parties, including the country, city, street, house and premises number and the address of the website, if any,
• (c) tax identification numbers of related parties and, in the absence thereof, other identification numbers for tax or social security purposes,

(d) information on the relationship between the related parties concerned under Article 11(1) or (4) the laws, in accordance with the condition in force on the day of the start of the tax year, and where the tax documentation is drawn up after the end of the tax year, in accordance with the condition in force on the day of the end of the tax year;

1. in relation to the description of the course of the transaction or other events in question under Article 9a(2b)(1) point (d) Act, description of the course of transactions or other events for the tax year, performed separately for each activity, including functional analysis and functional profile.
2. Elements of the transfer pricing tax documentation in accordance with the provisions applicable from 2019

From 2019 There have been further changes in transfer pricing legislation. For example, the definitions of related parties (as referred to above) and the quota thresholds, which should be exceeded, have changed. However, has the scope of the documentation itself changed? Although the provision is new, the elements were mostly analogous to those in the regulations of years 2017-2018.

According to Article 11 q section 1 the Corporate Income Tax Act (in the current version) the tax documentation of transfer prices should contain the following elements:

• 1) a description of the related entity;
• 2) a description of the transaction, including analysis of functions, risks and assets;

3) the analysis of transfer prices, including:

(a) an 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’ 10 , either

(b) an analysis demonstrating the conformity of the conditions under which the controlled transaction was concluded with the conditions which would be determined by unrelated parties, hereinafter referred to as ‘compliance analysis’, where the benchmarking is not appropriate in the light of the transfer price verification method or is not possible with due care;

1. financial information.

More detailed information on the above elements can be found in the Regulation of the Minister of Finance from 21 December 2018 on corporate tax transfer pricing documentation 11 (hereinafter referred to as the Transfer Price Documentation Regulation or the Regulation), which replaced the Regulation with 12 September 2017 According to the Regulation, the description of the related party should contain:

(a) a description of the management structure and organisational structure of the related entity,

(b) a description of the underlying activities of the related entity, including:

• – an indication of the activities carried out,
• – an indication of the geographic markets on which the related entity operates,
• – a description of the industry and market environment in which the related entity operates, indicating the impact of economic and regulatory conditions and identifying key competitors,
• – a description of the economic strategy,
• – information on economically significant functions, assets or risks affecting a related entity which were transferred in the financial year and the year preceding the financial year, if such transfer took place.

„first the transfer pricing documentation element is descriptive. It is intended to provide detailed information on the taxable person drawing up the dossier. This part of the documentation shall describe only the body drawing up the documentation. A description of the related party to the transaction shall be presented as follows:’ 12 . At the same time, it should be noted that the description of the management structure should not be limited to information on members of the management board or other persons representing the entity concerned; it must also refer to the competence of the persons concerned as to how the management decisions are taken. In addition to the description, an organisational scheme must be included in the documentation: ‘the legislature requires that in a graphic form it should show how the taxpayer’s company is organised. The scheme should therefore indicate all decision-making levels and individual departments of the company with an indication of their competence in such a way as to distinguish them from other organisational cells." 13 .

In turn, the description of the core activity should be as detailed as possible – especially when this activity is related to the transaction. The term ‘including’ indicates that these elements of the description are in no case a closed catalogue and may be supplemented with additional information for the widest possible presentation of the entity’s activities.

According to section 2 point 2 Transfer pricing documentation regulations, the transaction description should include:

(a) the subject matter and type of controlled transaction,

(b) information on the related entities involved in the controlled transaction, including:

• – the name and seat of the Management Board,
• – tax identification number and, in the absence thereof,
• – another identification number and its type,
• – identification of the main activity,
• – the nature of the links between these entities,

(c) functional analysis of related entities involved in the controlled transaction, taking into account significant changes compared to the previous financial year, describing:

• – functions performed,
• – risks incurred, including their ability to bear them,
• – the assets involved,
• (d) the method of calculating the transfer price, together with the assumptions adopted,
• (e) the value of the controlled transaction... broken down by counterparty;
• (f) payments received or transferred in connection with the controlled transaction, including deductions of mutual claims made,
• (g) agreements, intragroup agreements or other documents relating to a controlled transaction,

(h) tax agreements or interpretations concerning a controlled transaction, including prior price agreements, concluded with or issued by tax administrations of countries other than the Republic of Poland.

Given the above number of individual elements of the description, the transaction between related parties should be presented as comprehensively as possible, starting with the type of transactions and information about the entities with which it was concluded, by analysing the functions performed in the transaction by the individual entities, ending with financial elements such as pricing and payment arrangements.

For the reasons set out above, the last element of the tax documentation is financial information. The tax documentation should include the approved financial statements for the financial year, drawn up on the basis of the accounting rules and a description enabling the financial data relating to the audited transaction to be assigned to the item of financial statements or to other information contained therein.

4. Summary

When analysing how the provisions relating to elements of transfer pricing tax records have changed over the years, it is not difficult to see that the legislator seeks to force taxpayers to provide increasingly detailed information on controlled transactions and related entities with which these transactions are concluded. Undoubtedly, the inclusion of all the elements (as far as possible) set out in the above article may prevent taxpayers from having adverse consequences of non-declaration or of drawing up incomplete transfer pricing tax records.

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