Report on the implementation of an advance pricing agreement for corporate income tax purposes (APA-C)

On 29 November 2019 the new rules on prior price agreements, as laid down in the Act of 16 October 2019 on the settlement of double taxation disputes and the conclusion of prior price agreements 1 (Further: u.r.s.p.o.u.p.c.).

At present, the provisions on prior price agreements largely coincide with the existing provisions of Section IIa of the Act on 29 August 1997 - Tax Ordinance 2 (hereinafter referred to as ‘P’), which for a long time governed the rules relating to the conclusion of prior price agreements and on the date 29 November 2019 they've lost power.

Taxable persons to whom the Head of the KAS has issued a prior price agreement (APA) on the basis of Article 107(1) u.r.s.p.o.u.p.c., are required to report on the implementation of the prior CIT price agreement (APA-C).

This report must be submitted within the time limit applicable to the submission of a statement of the amount of income or loss incurred for the tax year (CIT-8). This obligation also covers taxable persons who have decisions on an agreement issued under the provisions previously in force, i.e. Chapter IIa o.p.

1. Obligation to report APA-C

The conclusion of prior price agreements in the vast majority concerns taxpayers with legal personality, and the APA-C form is therefore discussed in this article. The scope of the information to be disclosed in the APA-P form concerning natural persons is the same.

Models of APA-P and APA-C reports on the implementation of the prior price agreement shall specify:

• 1) Regulation of the Minister of Finance from 23 December 2019 on the model report on the implementation of the prior price agreement for the purposes of personal income tax[3]. The current APA -P pattern bears the number 1;
• 2) Regulation of the Minister of Finance from 23 December 2019 on the model report on the implementation of a prior price agreement for corporate income tax purposes 4 (Further: r.w.s.u.p.c.o.p.). The applicable formula APA-C has a number 1.

These regulations have entered into force 1 January 2020 Prior to the presentation of the APA-C report on the implementation of the prior price agreement, it is first necessary to clarify what a prior price agreement is.

1.1. Definition and legal validity of the prior price agreement (APA)

The APA (advance pricing arrangement) is a formal tool to reduce the risk of irregularities

it establishes transfer pricing, which therefore excludes the possibility for tax authorities to contest prices. The APA shall take the form of a document, issued at the request of the taxpayer, in which the Head of the KAS accepts the choice and use of the transfer pricing method used in transactions with related parties.

Acceptance of the application shall be made by decision. Given that the tax authorities' challenge of transfer pricing could lead to double taxation, prior price agreements also serve as a tool to reduce the risk of taxation of income generated in cross-border transactions by both parties to the agreement.

As already noted, 29 November 2019 the arrangements for prior price agreements were included in the IIA section. Currently, regulations relating to the conclusion of prior price agreements are contained in the law of u.r.s.p.o.u.p.c., including rules on the resolution of disputes concerning double taxation, as rules on matters with one fields. The new APA regulations are largely beneficial to taxpayers and can help them to make this procedure more accessible.

According to u.r.s.p.o.u.p.c., a legal definition of a prior price agreement has been introduced. According to Article 81(1) u.r.s.p.o.u.p.c. prior price agreement is a decision which considers that the transfer price of the controlled transaction has been set on terms that would have been determined among unrelated parties.

It should be pointed out that the existence of prior price agreements by taxable persons is very beneficial, for example because, during the period of application of the prior price agreement, the tax authority does not determine the tax liability (the amount of the loss) to the extent that the taxable person's income (loss) has been established in accordance with that agreement.

In addition, those responsible for handling cases may feel safe as regards the regularity of transfer pricing applied in transactions with related parties. Another benefit of having APA is the exemption from the obligation to draw up local transfer pricing documentation.

The following types of prior price agreements are distinguished:

• 1) one-sided – most often concerns agreements concluded only between national related parties,
• 2) bilaterally, they are concluded when the controlled transaction concerns a national and foreign entity and the Polish tax authority communicates with one, the competent foreign tax authority,
• 3) multilateral – when the Polish tax authority communicated with more than one, the competent foreign tax authority.
• 1.1.1. Taxable persons entitled to apply for a prior price agreement

A request for a prior price agreement may be submitted by a national related entity (resident, established or managed in the territory of the Republic of Poland) participating in a controlled transaction covered by the agreement.

Furthermore, such a request may also be made by a natural person, a legal person or an organisational unit not having a legal personality established, established or managed outside the territory of the Republic of Poland, which intends to form a national affiliated entity established in the territory of the Republic of Poland.

In the present case, a prior price agreement will be issued to a national related party (Article 83(1), Article 84(1-3) u.r.s.p.o.u.p.c.). Such a solution significantly increases the attractiveness of previous price agreements for foreign investors.

Example

Company X, established in Germany, operates in the construction industry, is a producer of blasted iron. Company X concluded an agreement to supply finished products and carry out construction works in a large development project in Poland. Therefore, it intends to establish a related special-purpose company in Poland.

Company X wants to confirm the applicable price of finished products and therefore wishes to conclude a prior price agreement on the applicable price of finished products. Before the work starts and before the establishment of the special purpose vehicle, he intends to ask the Head of the KAS to issue a prior price agreement.

Obtaining a decision in this case will exclude the possibility for tax authorities to contest prices at a later stage, i.e. during the implementation of the investment. Note: in the present case, if the decision is taken, the prior agreement will apply to the special purpose vehicle, i.e. a national entity.

It is possible to initiate a prior price agreement procedure before the start of the investment, i.e. before the creation of a national related entity.

This means that an application for a prior price agreement may relate to a future controlled transaction to be carried out between the applicant and the national related entity only after that entity has started operating.

This solution therefore creates the possibility for foreign entities that are planning to invest in the territory of Poland to apply for a prior price agreement by setting up a subsidiary to operate. The regulations contained in the IIA O.P. Department, repealed by the regulations of u.r.s.p.o.u.p.c., did not include such a solution.

1.1.2. Scope of the request for prior price agreement

Under Article 90(1) The elements of the application for a prior price agreement have been specified. Such an application shall include:

1. information on the applicant and other related entities involved in the controlled transaction, in particular:

(a) a description of the applicant's main activities, including:

• – an indication of the activities carried out,
• – an indication of the geographic markets on which the applicant operates,
• – a description of the industry and market environment in which the applicant operates, indicating the impact of economic and regulatory conditions and identifying key competitors,
• – a description of the economic strategy,

(b) a list of the other related entities involved in the controlled transaction, together with an indication of the registered office or the place of their management, the tax identification number and, in the absence thereof, another identification number, together with the identification of its type and the subject matter of their business,

(c) a description of the management structure and organisational chart of the applicant and other related entities involved in the controlled transaction,

(d) a description of the accounting policies adopted to the extent that they apply to the controlled transaction applied by the applicant and other related entities involved in the controlled transaction;

2) information on the transaction under scrutiny, including:

• (a) an indication of whether the controlled transaction is a transaction that has already been initiated or a future transaction, including the transaction in question under Article 84(2) u.r.s.p.u.p.c.,
• (b) the subject matter and type of the controlled transaction,

(c) functional analysis of related entities involved in the controlled transaction, describing:

• – the functions performed, including the ability to perform them,
• – risks incurred, including their ability to bear them,
• – the assets involved,
• (d) agreements, intragroup agreements or other documents relating to a controlled transaction,
• (e) information on tax agreements or interpretations relating to controlled transactions, including transfer pricing agreements, concluded with tax administrations of countries other than the Republic of Poland or issued by those administrations,
• (f) an indication of the method of verification of the transfer price, together with a brief justification for the selection,

(g) comparative analysis within the meaning of Article 23zc(1)(3) point (a) Act on 26 July 1991 on personal income tax 5 (Further: u.p.d.o.f.) or Article 11q(1)(3) point (a) Act on 15 February 1992 on corporate income tax 6 (Next: the Corporate Income Tax Act), or conformity analysis within the meaning of Article 23zc(1)(3) point (b) either Article 11q(1)(3) point (b) the Corporate Income Tax Act, and the identification of the party or transaction to be examined in the analysis, if this results from the method indicated in point (f), with a justification for the selection,

(h) a description of the method of calculating the transfer price, including the assumptions set out in that calculation, including the financial forecasts on which the transfer price is calculated,

(i) the critical assumptions on the basis of which it was accepted that the method indicated in point (f) accurately reflects the transfer price;

3) an indication of the duration of the prior price agreement;

1. an indication of whether the proposal concerns a unilateral prior price agreement, whether a bilateral agreement or a multilateral agreement;
2. as regards bilateral agreements and multilateral agreements, information on the submission of an application to the competent foreign authority by foreign affiliates, including:

(a) the names of those entities,

(b) the country where the application was or will be made, and

(c) the date of its submission, if known.

It requires that the scope of the request for a prior price agreement is largely aligned with the scope of the transfer pricing documentation. This is significant

to make it easier for taxpayers to reduce the workload involved in creating this proposal.

Example

Company X, one of the entities in the group, carries out production activities: sells finished products to another entity of the group. Company X wishes to enter into a prior price agreement concerning the price used for this sale transaction, in order to eliminate the possibility for tax authorities to challenge this price. He therefore requests the Head of the KAS to issue a decision on the above case.

1.1.3. Scope of the prior price agreement

Under Article 83(2) the scope of the prior price agreement has been defined. The Head of the KAS shall take into account the elements contained therein in this Agreement. However, the catalogue is open. The prior price agreement shall specify in particular:

• 1) the controlled transaction covered by the prior price agreement and the related entities involved in it,
• 2) the functional profile of related entities involved in the controlled transaction, including in particular the functions performed, the risks incurred and the assets involved,
• 3) the method of verification of the transfer price,
• 4) method of calculating the transfer price,
• 5) critical assumptions on the basis of which it was accepted that the method indicated Under point 3 accurately reflects the transfer price,
• 6) the scope of individual information to be indicated in the report on the implementation of the prior price agreement.
• 1.2. Date of submission of the APA-C report

The taxable persons to whom the Head of the KAS has issued a prior price agreement shall be required to submit an APA-C report on the implementation of the prior price agreement for CIT purposes.

With the entry into force of R.w.s.u.p.c.o.p., the obligation to report on the implementation of the prior price agreement has replaced the existing model report on the implementation of the recognised method of determining the transaction price for CIT purposes.

A report on the implementation of the prior price agreement shall be submitted for each tax year covered by the prior price agreement within the time limit applicable to the submission of the annual tax return. For taxpayers whose tax year is the same as the calendar year, this is 31 March.

Entities with prior price agreements issued before the date of entry into force of u.r.s.p.o.u.p.c., i.e. before 29 November 2019, draw up and report on a new basis. To these entities, reporting obligations remain unchanged (Article 126 u.r.s.p.o.u.p.c.). This means that such taxpayers fill out a report on the conclusion of a prior price agreement on a new form.

2. Explanations to the template of the APA-C report

The APA-C reports were separated from annual income tax statements, due to their indirect link with the data contained in the annual accounts. In the APA-C form, taxpayers shall report on the implementation of the prior price agreement within the time limit for the submission of the annual statement. The body to which the report belongs shall always be the Head of the KAS. The model APA-C report is also available in electronic form so that it can be submitted using a qualified electronic signature.

2.1. Part A. Place and purpose of reporting

In item 7 the appropriate box should be indicated for reporting or correcting the report as appropriate.

2.2. Part B. Data of the taxpayer

In item 8 the taxpayer shall enter its full name. The taxpayer is the entity to which the decision on the prior price agreement has been issued.

2.3. Part C. Prior price agreement to which the report relates

In items 9-12 The taxable person shall enter the data by which a prior price agreement can be identified. In item 10 the individual number of the prior agreement given by the Head of the KAS shall be entered. In item 11 and 12 the taxable person determines the duration of the prior agreement. This period may not exceed 5 the tax years and the duration of the prior price agreement expires at the end of the tax year of the applicant.

In item 13 indicate the type of agreement to which the report relates:

1) one-sided price agreement, if the competent authority in the case does not communicate with the competent foreign authority, i.e. when the controlled transaction is concluded:

• (a) exclusively between national related parties,
• (b) between the national related entity and the foreign related entity and the national related entity did not request an agreement with the competent foreign authority;
• 2) bilateral price agreement – is indicated when the control transaction
• was concluded between the national related entity and the foreign related entity, and the Head of the KAS, at the request of the national related entity, communicated with the one the competent foreign authority;

1. Multilateral Price Agreement – it is indicated when the controlled transaction was concluded between the national related entity and the foreign related entity and the Head of the KAS, at the request of the national related entity, communicated with more than one the competent foreign authority.
2. 4. Part D. Related parties to the prior price agreement

In part D, consisting of subsection D[1] and D[2], the data of the related parties concerned should be entered. In item 14 and 15 the full name of the taxable person or, respectively, the name of the natural person shall be entered, In items 20-28 the exact address of the taxpayer’s residence or residence.

In items 16-19 the tax number of the foreign entity (tax identification number), its type and the country of issue of the foreign entity identification number must be provided. For example, passport, official document or other identity document.

1. 5. Part E. Method for verifying the transfer price during the reporting period

In item 29 the method of verification of the transfer price adopted in the prior price agreement shall be provided. These may be methods:

• 1) a comparable uncontrolled price,
• 2) sales prices,
• 3) cost plus,
• 4) net transaction margin,
• 5) profit sharing.

If the taxable person has not applied any of them, he shall enter another method used by him in the agreement. Operators who report on the implementation of the prior price agreement issued under the provisions of the IIA Division shall enter the method of determining the transfer price instead of determining the methods of verification.

This obligation also applies to item 32 „period of application of the transfer price verification method’. Form fields numbered 30 and 31 are the same for taxpayers, regardless of the legal basis for the agreement.

These items shall include, respectively, the volume of sales of goods and services using transfer prices and the amount of transfer prices covered by the prior agreement and applied to related parties.

Position 29 the method of verification of the transfer price, which is specified in the decision of the Head of the KAS on the prior price agreement, should be supplemented by the method used in the controlled transaction covered by the prior price agreement.

Example

Company X together with related companies operates in the tourism industry. The activity of the group is that company X, as a central entity, carries out advertising, marketing activities, and other entities in the group provide accommodation to customers. The related parties provide exclusive accommodation services to X’s customers.

The price for overnight accommodation was established at market conditions using a comparable uncontrolled price method. Company X, in order to confirm the market value of the applicable price, decided to apply for a prior price agreement on this transaction.

Company X, when reporting on the implementation of the prior price agreement, is required to indicate what method of verification of the transfer price it has adopted in the prior agreement, this is a comparable uncontrolled price.

Position 30 the actual value of the controlled transaction subject to the prior price agreement should be added. In this field, reference must be made to the financial forecast on the basis of which the transfer price calculation is based, i.e. as specified in the decision of the Head of KAS on a prior price agreement, by stating the actual value of the controlled transaction covered by the prior price agreement.

Position 31 the value of the profit in the controlled transaction subject to the prior price agreement should be added. This item also refers to the financial forecast on which the transfer price calculation, as set out in the decision of the Head of KAS on the prior price agreement, is based, by stating the actual value of the profit in the controlled transaction covered by the prior price agreement.

2.6. Part F. Individual information specified in the prior agreement

Part F has been divided into sections F.1. and F.2., and only concerns a prior price agreement based on the new rules. The items in this part of the form should be supplemented by the extent of the information specified in the prior price agreement during its duration.

The purpose of introducing individual information in prior price agreements is to individualise and adapt the prior agreement to the nature of the controlled transaction, as well as the individual characteristics of the taxable person to whom the authority has issued the prior price agreement.

This information enables the reporting taxable persons to provide information enabling them to be individualised. This may be, for example, information on the type of activity or the nature of a particular transaction. This allows for a more accurate verification of the application of the prior price agreement by the tax authority.

For example, if In item 33, as a range of information, operating costs will be indicated, In item 34 The value of operating costs and other operating costs constituting the cost base should be indicated for the calculation of the operating margin ratio.

2.7. Part G. Additional information

In item 35 information on the change in economic relations which may have led to a substantial change in the elements of the prior price agreement should be indicated. This item includes, for example, information on the type, reason and financial implications of changing the choice of the transfer price verification method, if any.

In other words, it should be justified here why the change was made and what effect the amendment of the elements of the agreement, such as the modification of the method of calculating the transfer price, had on the prior price agreement.

2.8. Part H. Persons representing the taxpayer

In items 36-37 the details of the natural person representing the taxable person must be entered, In item 38 the date of completion of the report, and In item 39 the person representing the taxable person shall sign.

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The article comes from the book Publishing House C.H. Beck "Tax Declarations with Explanations" (Series: Law in practice, year: 2021) + CD, under the ed. prof. dr. Henryk Dzwonkowski, Tax returns with explanations + CD, 2021, Henryk Dzwonkowski - Ksiegarnia.beck.pl.