Guidelines of the Organisation for Economic Cooperation and Development (OECD) on the tax implications of transactions between related parties. The documents drawn up by the Organisation for Economic Cooperation and Development are not binding on Member States. They are only guidelines for future national legislation.
These documents could be referred to as "soft law" – soft law. In the field of tax law, the key document drawn up by the OECD is the Model Tax Convention on Income and Assets from 1997. The Convention contains guidelines on the principles of the avoidance of double taxation which form the basis of international agreements in this area.
Regarding the definition of a related company included in Article 9 The OECD Model Convention (hereinafter: Mod. Konw.), should be concluded that if the conditions for transactions between related parties are established which result in less income declared one from entities/no taxable income, unprofitable profits will be assigned to this company and taxed accordingly.
This provision provides a framework for the assessment by tax authorities of the income generated by traders entering into business transactions with subsidiaries, under conditions that are different from market levels.
In the event of a commercial transaction on the international market between a Polish taxpayer and an entity resident in another country which is a party to an international agreement on the avoidance of double taxation concluded with Poland, these regulations have priority over national legislation. International agreements in this area are based on the OECD Fashion.
According to Article 9 Mod.Conv. OECD when the company (company): · participates directly in:
- • management,
- • control or
- • in capital second an undertaking resident in another country,
· or the same persons have an indirect / direct influence on
• management,
• control or
• capital of enterprises operating in those countries,
and as a consequence, commercial or financial conditions will be adopted between them which deviate from those which would determine independent entities - it is profit one from companies established at market level may be assigned to that company and will be taxable.
The adopted definition of related enterprises in Mod.Konw. also includes entities with so-called holding links, entities managed jointly by the parent entity or entities operating under joint management, where one of companies has a significant share in second company.
However, the provisions of international agreements should protect taxpayers from double taxation of income from a transaction concluded with a related entity. In order to ensure this protection to taxable persons, the rules of international agreements on the avoidance of double taxation provide that where income of an undertaking taxed in the country of residence is shown as income second taxable companies including second the country is the amount of tax due on that income including second the State should be reduced accordingly (provided that the terms of the transaction were set at market level).
These provisions Article 9(2) Mod.Conw clearly aims to prevent twice-taxing once generated income from cross-border transactions. Provisions of the Resolution of the Council of the European Union and of the Representatives of the Governments of the EU Member States of 27 June 2006 on a code of conduct on transfer pricing documentation for associated companies in the EU (EUDCTUResolution of the Council of the European Union and representatives of the governments of the Member States of the European Union meeting within the Council of 27 June 2006 on a code of conduct on transfer pricing documentation for associated companies in the European Union (DCT EU), the code of conduct developed for Member States and taxpayers provides a useful instrument for the implementation of a standardised and partially centralised transfer pricing documentation in the European Union to simplify transfer pricing requirements for cross-border activities.
Consequently, the Council Resolution introduced a non-binding "model" of transfer pricing documentation for associated companies in the European Union.
Normalised and consistent documentation for multinational companies should consist of two main parts: · one a set of documentation containing common standardised information relevant to all members of the EU group (the ‘basic dossier’), and · individual sets of standardised documentation containing country-specific information (‘specific documentation The country").
The documentation should contain sufficient information to enable the tax administration to carry out a risk assessment in order to select cases or, at the beginning of the tax audit, to ask relevant and detailed questions about the transfer prices of the multinational company and to assess the transfer prices used in intra-corporate transactions.
The undertaking should draw up a single dossier for each Member State concerned, i.e. one common basic documentation which is used in all Member States concerned and different sets of country-specific documentation for each Member State.
The basic documentation should reflect the economic reality of the company and provide a general description of the group and its transfer pricing system, which is relevant and accessible to all EU Member States concerned.
The basic documentation shall contain the following elements: (a) a general description of the undertaking and its strategy, including changes in the strategy of the undertaking compared to the previous tax year; (b) a general description of the organisational, legal and operational structure of the group (including the organisational scheme, the list of members of the group and the ownership of the parent undertakings in subsidiaries); (c) a general list of associated companies involved in controlled transactions with EU companies; (d) a general description of controlled transactions involving EU affiliated companies, i.e.
a general description of: a. flows of transactions (material and intangible assets, services, financial elements); b. invoice flows; and c. transaction flows; (e) a general description of the functions performed, the risks incurred and a description of the changes on functions and risks compared to the previous tax year, e.g.
changing the statutes of the self-distributor to the customer; (f) ownership of intangible assets (patents, trademarks, brand names, know how, etc.) and royalties due or received; (g) the intra-corporate transfer pricing policy applied by the group or a description of the group transfer pricing system, which indicates how the transfer pricing of the company complies with the market price principle; (h) a list of cost-sharing agreements, prior pricing agreements and transfer pricing decisions, in so far as EU members are concerned; and (i) an undertaking by each national taxable person to provide additional information on request and in due time in accordance with national rules.
The content of the country-specific documentation shall be supplemented by the basic documentation. A country-specific documentation shall be available to those tax administrations which are reasonably interested in the appropriate tax treatment of transactions covered by that documentation.
In addition to the basic documentation, the country-specific documentation should contain the following elements: (a) a detailed description of the undertaking and its strategy, including changes in the strategy of the undertaking compared to the previous tax year; (b) information, i.e.
description and explanation, on controlled transactions relating to a particular country, including: a. transaction flows (material and intangible assets, services, financial elements); b. invoice flows, and c. transaction flows; (c) the analysis of comparability, i.e. a. ownership and service characteristics; b.
Functional analysis (functions performed, assets used, risks incurred); c. contractual terms; d. economic situation; and e. detailed business strategies; (d) an explanation of the choice and use of the transfer pricing method or methods, i.e.
why the transfer pricing method was chosen and how it was applied; (e) appropriate information on internal or external comparative elements, where available; and (f) a description of the implementation and application of intra-corporate transfer pricing policies within the group.
It should be noted that the provisions of the Resolution on the requirements of formal transfer pricing documentation are largely consistent with Polish regulations Article 9a Updop.
The provisions of the Arbitration Convention as regards the communication procedure in the case of an estimate of income relating to transactions concluded between associated entities by tax authorities of different countries.
In order to reduce or eliminate economic double taxation of related entities, the procedure regulated in Article 25 Model Convention – the so-called Mutual Communication Procedure. However, in practice, this procedure is ineffective. The most positive effects in this respect should be those introduced with regard to prior price agreements.
A multilateral international agreement, the Arbitration Convention on the elimination of double taxation in relation to the correction of profits of related companies, is a key instrument for harmonising income tax rules in the EU. Convention provisions entered into force 1 January 1995, However, until now Poland has not ratified the Convention.
The provisions of the Arbitration Convention establish an alternative procedure for resolving disputes between EU countries concerning taxation of transaction income between related parties, in relation to the mutual communication procedure provided for in the Model Convention and in specific double taxation agreements.
The primary objective of the Convention is to eliminate double taxation in the event of an estimate of the income of the taxpayer established in one country for the execution of a transaction with a related entity established in second country where the valuation of the subject matter of the transaction has not been carried out in accordance with market principles.
A clear double taxation effect is achieved when an increase in taxable income one the related entity is not correlated with the corresponding reduction in taxable income second a taxpayer. In that case, the profit generated by the related entities as a result of the transaction is double taxed in the country of residence first and second a taxpayer.
This is contrary to the common market of the European Union. Taxable persons (related entities) operating in this market are therefore entitled to demand to offset this adverse economic effect by a correction reducing taxable income in the second country by the amount of the increase in taxable income in first country. The result of this demand is a dispute between the tax administrations of the states of residence of the related entities involved in the transaction.
In accordance with the provisions of the Convention, in the event of such a dispute, a conciliation and arbitration procedure should be applied to remove the effect of double taxation. However, before the dispute arises, the tax administration of the taxing country should inform the taxpayer of this intention within the prescribed time limit (according to Article 5 The Arbitration Convention) so that it can notify the related party, and this in turn its tax administration, requesting an adequate reduction in taxable income.
When an agreement is reached between related parties and tax administration second States will agree to correct the income (repealing their budgetary revenues), the procedure is terminated without the need to initiate a settlement and arbitration procedure.