Interpretation published by the Director of KIS on 27 August 2021 confirms that the payment of compensation for the reduction of production during the pandemic is a reasonable measure to achieve the desired objective, i.e. to maintain favourable conditions of cooperation, and thus, once the production process has resumed to its full extent, the possibility of achieving the intended production objective seamlessly, which should be seen as a way to preserve or safeguard the source of revenue.
The applicant that requested an interpretation belongs to a group of related parties within the meaning of Article 11a(1)(4) Act on CIT, operating in Poland in the value chain covering the production and distribution of food of animal origin (hereinafter "Group X"). Group X belongs to Group Y., Inc.
(established in...), which is one of the world's largest pork producers whose main shareholder is Z. listed on the Hong Kong stock exchange. As far as its activities are concerned, the company concludes contracts with external service providers (hereinafter: "Service Providers") for the provision of meat production services.
Contracts shall specify the mutual obligations of the parties and the specific scope of the services shall be indicated in the production orders transmitted to the Service Providers. Services are provided directly to the Company's branches. To prevent the spread of SARS CoV-2, The company decided to limit the production process.
Due to these limitations, Service Providers have lost their ability to partially perform services in the expected, budgeted values to which they have adapted their organisational capacity.
The doubts were dispelled by the interpretation of the Director of KIS, who stated that any expenditure incurred by the taxpayer should be subject to an individual analysis in order to exercise its legal competence, and in this particular case and analogous cases, it can be concluded that compensation for the reduction of production imposed by the pandemic can be regarded as costs
Therefore, as a result of negotiations with the Service Providers, the conditions for payment of financial compensation have been agreed to minimise the negative consequences of the restrictions mentioned above affecting mutual cooperation with the Service Providers.
The agreement concluded in connection with these arrangements (hereinafter: "Agreements") assumes that the Company will pay the Service Provider financial compensation for the month in which it lost the possibility of partially performing services The amount of financial compensation shall be calculated on the basis of the planned quantities of technological process operations to be performed by the Service Provider or on the basis of the average daily remuneration of the Service Provider achieved in the month in which the Agreement was concluded and the rules on the clearing of services resulting from the contracts concluded.
The agreements also assume that the amount of compensation will exhaust any claim of the Service Provider against the Company for the loss of the possibility of partial provision of services.
The Company wishes to emphasize the fact that Service Providers are in practice one of the Company's main business partners, and the Company depends on having an uninterrupted opportunity to use their professional services.
Service providers provide highly specialized meat production services and the performance of the activities covered by the services provided would not be possible by means of internal resources of the Company.
The company is therefore committed to maintaining a positively assessed cooperation with the Service Providers, who, thanks to the compensation received, will be able to maintain their own production capacity at a level that ensures that, once the Company resumes its production process fully, the intended production targets.
In the light of the above, doubts arose on the Company's side regarding corporate tax qualifications of financial compensation paid to the Service Providers to minimise the negative consequences of the limitations imposed by the Company in the production process.
Applicant by letter with 22 July 2021 It clarified the fact and future event set out in the application, indicating that the service providers with which the applicant enters into service contracts and the arrangements under which the financial compensation to minimise the negative consequences of the restriction of production by the applicant do not meet the definition of the applicant’s related entities within the meaning of the provision Article 11a(1)(4a) CIT Act.
In addition, it explains that the Service Providers’ claims against the Applicant for the loss of the possibility of partially performing services which will be exhausted as a result of the conclusion of the Agreement and payment of compensation do not result directly from the contracts concluded with the Service Providers for the provision of meat production services. However, it should be borne in mind that, in connection with the company's introduction to prevent the spread of SARS CoV-2 limitations in the production process, Service providers have lost their ability to partially carry out the services resulting from their contracts in the expected, budgeted values to which they have adapted their organisational capacity.
Therefore, as a result of negotiations with the Service Providers, the conditions for payment of financial compensation were agreed to minimise the negative consequences of the restrictions mentioned above. Service providers, thanks to the compensation received, were able to maintain their own production capacity at a level that ensured, after the Company resumed its production process to a full extent, that the intended production targets would be met, in turn to the planned level of sales of the manufactured products and to achieve the assumed revenue.
As a result, the support to the service providers ensured the speed of return to normal activity, i.e. by maintaining their own production capacity, service providers could immediately enter into cooperation with the Company just after the obstacles resulting from the coronavirus epidemic ceased.
Thus, the Company retained the possibility of securing the source of revenue and could immediately resume the production process at the desired production capacity, thus generating revenue from the sale of products, without being limited by the lack of availability of service providers who provide the necessary support for the production processes.
From an economic point of view, the actions taken by the Company should therefore be considered rational and geared towards maximising the production process and hence the revenue achieved. The legal basis for the payment of fixed compensation shall be concluded with the Service Providers of the Agreement.
In the light of the above, doubts arose on the Company's side regarding corporate tax qualifications of financial compensation paid to the Service Providers to minimise the negative consequences of the limitations imposed by the Company in the production process.
The doubts were dispelled by the interpretation of the Director of KIS, who stated that any expenditure incurred by the taxpayer should be subject to an individual analysis in order to perform its legal competence, and in this particular case and analogous cases, it can be concluded that compensation for the restriction of production, forced by the pandemic, can be regarded as costs of obtaining revenues which are directly linked to the revenue obtained.
It was also shown that they were reasonably incurred to generate revenues, even though for objective reasons the revenue was not achieved and can therefore be classified as revenue costs.