The Ministry of Finance has published a draft tax explanations on the presumption and due diligence referred to in the Income Tax Act. The explanations are to be used only for due diligence within the meaning of transfer pricing rules for billing verification second parties to transactions with a paradise entity.
Under the revised provisions of the Income Tax Act, taxpayers are required to document not only transactions carried out directly with entities from tax havens, but also transactions for which the other party (non-paradise entity) has an actual owner who has a residence, seat or management in a tax haven.
At the same time, the presumption was accepted that for transactions whose value exceeds 500,000 PLN, the actual owner is a paradise entity if the other party to the transaction settles with the entity from the tax paradise.
This means an examination of the accounts by the transaction side with its other counterparties, which is a relatively far-reaching expectation for taxpayers from the tax administration.
Surely the situation of taxpayers does not improve the fact that the legislator has imposed on them the obligation to establish the abovementioned circumstances in accordance with the standard of "due diligence"
This limit 500,000 PLN concerns the value of transactions between the taxpayer and the other party to this transaction. In case of settlement between the other party to the transaction and the Paradise entity, the legislator has not introduced any materiality threshold.
The draft explanations indicate that settlements with a paradise entity should be understood as a settlement with the settlement counterparty, where this settlement may take different forms, including through a transfer of funds as well as by the transfer of a property or service.
The value of these settlements does not matter, so taking such a line of reasoning, already settlements with a value 100 PLN results in the application of the presumption and the need to draw up tax records.
Such wording is a far-reaching shift to the taxpayer of the consequences of actions which remain outside its actual sphere of influence.
This is a controversial solution, the adoption of which results in the inability to clearly determine the scope of the obligations incumbent on the taxpayer and forces taxpayers to take action to investigate and determine the circumstances which are entirely on the part of their counterparties.
In particular, this obligation concerns unrelated parties and the value of the underlying transaction at the level of 500,000 PLN means that it may in many cases affect counterparties with whom there is no permanent business relationship.
Surely the situation of taxpayers does not improve the fact that the legislator has imposed on them the obligation to establish the abovementioned circumstances in accordance with the standard of "due diligence".
Whenever the concept of due diligence appears in the provisions of tax laws, this raises numerous doubts, as this is an imprecise criterion and it is difficult to determine when in a given situation the taxpayer's careful actions were "sufficiently proper".
On the basis of this concept, which operates, among others, in the area of VAT, there have been numerous explanations, brochures, more or less official methodologies, but doubts remain in this area.
Whenever the concept of due diligence appears in the provisions of tax laws, this raises numerous doubts, as this is an unacquainted criterion and it is difficult to determine when, in a given situation, the taxpayer's careful actions were "sufficiently appropriate
This time, in the draft explanations, the authors try to clarify this issue as briefly as possible in the context of the examination of the circumstances with the counterparty and to identify possible means to be used by taxpayers. However, the proposed wording continues to contain very general statements, e.g.
‘to determine the circumstances of the second page of the transaction with the Paradise entity can be based on anything that can help explain these circumstances and is not contrary to the law.
The draft explanations also suggested that taxpayers obtain from the counterparty a statement that would indicate that the second party does not make any settlements with the Paradise entity during the tax year. Obtaining such a statement is intended to exhaust actions of due care.
At the same time, however, a reservation was made that due diligence would not be maintained if, despite obtaining a declaration, the taxpayer had information that the declaration was not in line with reality. In such a case, the taxpayer should take further steps to verify the reality of the counterparty.
Of course, it is impossible to indicate a catalogue of specific activities that the taxpayer should then perform, but allowing such an option means one parties weakening the statement itself as a means of maintaining due diligence, and second, this means certain possibilities for the tax authorities to question claims.
For related parties, due diligence will imply verifying other information received from that entity, such as tax records, CbC information, financial statements, ownership structure.
Opinions and comments on the draft explanations may be submitted by date 20 April 2021.
The draft explanations are available at:
https://www.podatki.gov.pl/ceny-transferowe/wyjasnienia/konsultacje-podatkowe-domniemanie-oraz-nalezyta-starannosc-w-cenach-transferowych/