On 27 October 2015 A law amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other laws has been signed, introducing a number of changes concerning the documentation of transactions between related parties and transactions with entities domiciled, established or held in countries applying harmful tax competition (hereinafter ‘tax havens’).
These changes have a significant impact both on the criteria for the establishment of the obligation to draw up documentation and on its substantive content. The overwhelming portion of them will enter into force by day 1 January 2017 Even a three-level transfer pricing documentation will apply to tax havens and related parties.
The new rules assume that the documentation obligation will be proportionate to the amount of the taxpayer's income and the risk of underselling income resulting from these transactions.
Local file
Taxable persons who meet the basic criteria, i.e. they will achieve revenue or costs in the preceding year at least 2,000,000 EUR within the meaning of the accounting provisions and carry out transactions or events in the tax year having a significant impact on the level of income generated, the Local file will apply.
Transactions or events that have a significant impact on the amount of income (loss) of the taxpayer will be considered to be transactions or events one types whose total value exceeds the equivalent of mines in the tax year.
50,000 EUR (in the case of taxable persons whose revenue last tax year exceeds 2,000,000 EUR and more will apply higher limits).
This document will be a basic form of transfer pricing documentation.
The data that will need to be presented in the transaction will include a description of transactions and other events (including cost sharing and liquidity management agreements between related parties), including, inter alia, the type and subject matter of the transaction, financial data including cash flows, an indication of the related entities and a description of the course of the transaction, including the functions performed, the assets involved (including off-balance sheet), human capital and risks incurred.
Furthermore, Local file will describe the method and method of calculating the taxpayer's income (loss) together with the justification for their choice. It should be pointed out that there is no obligation under the current legislation to provide such justification in the tax documentation.
Tax payers will also be required to submit their financial data (from which will result, among others, in how the recorded transaction affected the financial statements), the organisational and management structure, the economic strategy pursued, the business conducted and the competitive environment. Documents such as agreements and agreements concluded between related parties will also have to be attached to the dossier.
Taxable persons whose income or costs in the previous tax year exceed 10,000,000 EUR, they will be required to complete the documentation with an analysis of the independent entities concerned, together with a summary of the relevant assumptions of this analysis (the so-called benchmark). In addition, when in a tax year their revenue or costs exceed that threshold, they will be required to join the tax return for that year of the simplified CIT-TP report.
In addition, the amendment of the rules indicates a specific deadline for drawing up the tax documentation: by the date of expiry of the deadline for submitting the tax return for a given tax year, and also introduces an obligation to submit a statement to the tax office of drawing up the complete documentation within that period. This statement of complete documentation will only apply to Local File (not to Master File and Domestic File).
Master file
Entities that operate within the capital groups and in the tax year preceding the tax year have achieved income or incurred costs within the meaning of the accounting rules exceeding 20,000,000 EUR, will be obliged to prepare Master file (group documentation).
In this section, the documentation will include information on the group of related parties, and in particular: an indication of the entity that has drawn up the documentation, a description of the group's organisational structure, the rules for determining transaction prices (transaction pricing policy), the characteristics of the group's activities, the description of intangible assets (held, created, developed and used by the group), a description of the financial situation between the entities that form the group (including the consolidated group's accounts), and a description of the entities' income tax agreements with other countries' tax administrations (the so-called APA). Master file may be drawn up by any entity in a given group, whereas responsibility for the reliability of the documentation will lie with the taxpayer who will submit such document to the tax authorities.
The taxpayer will be obliged to prepare the Master file for the tax year at the same time as the Local file, i.e. until the date of the tax return for that tax year.
Domestic file (CbCR)
Parent companies of capital groups whose consolidated turnover in the previous tax year exceeded the equivalent 750,000,000 EUR will be required to draw up a document Domestic file.
This element of the tax documentation will contain the most important information on the activities of the multinational company in the individual tax jurisdictions in which they operate the company of the group concerned.
This will include information on the distribution of global income, taxes due and paid and some indicators related to the activity in individual countries. Such a report shall be sent to the tax office within the time limit 12 months after the end of the tax year.
Domestic file legislation entered into force 1 January 2016, which means that first CbCR taxpayers will have to submit to 31 December 2017
Documents in accordance with the above provisions will also have to be prepared by entities operating through a foreign establishment (both Polish and foreign in particular in relation to transactions between those entities and their undertakings), entities obtaining revenue from participation in a company which is not a legal person (when the value of the contributions contributed by the shareholders exceeds 50,000 EUR, and the value of the revenue or costs of that company will exceed in the previous tax year 2,000,000 EUR), as well as entities concluding agreements of the Joint Undertaking (limit 50,000 EUR will refer to the value of the Joint Undertaking). The provisions concerning the limits on the existence of a documentation obligation for transactions with tax havens have not changed.
It should also be pointed out that the amendment of the Act will change one the most important criteria for establishing links between actors. From 1 January 2017 the level of direct or indirect participation in the capital of another entity determining the existence of links will be increased from 5% to 25%.
The provision on submission of documentation at the request of tax authorities or tax authorities will not be amended. It will still be the deadline 7 the days after service of the request.
However, a new provision will be introduced that will allow tax authorities or tax control authorities to apply to the taxpayer requesting documentation for transactions that do not exceed the statutory thresholds where there is a likelihood of undervalue of transactions or events in order to avoid the obligation to produce documentation.
The taxpayer will be required to submit such documentation within the time limit 30 days from the date of service of the request.
Summary
The amendment introduces a number of changes related to transfer pricing documentation.
The amount of additional information that the taxpayer will be required to include in the documentation will not only increase the responsibilities of the person responsible for drawing it up and will significantly prolong its time, but will above all increase the risk of transfer prices and potential disputes with tax authorities.
Surely many companies will be forced to engage professional actors to meet new documentation requirements. After all, neither the law nor the implementing regulations provide detailed and practical guidance on the preparation of some of its elements, e.g. comparative analysis.