Only a reliable tax record can be an effective tool to protect the rights of the taxpayer in the course of the review procedure."
On 13 October 2016 The Supreme Administrative Court issued a judgment (reference no. II FSK 2288/14) moving two important transfer pricing issues. A written justification has recently been published in which both issues have been clarified in detail.
First, the question of the non-application of a sanctioned tax rate after the expiry of the 3 years after the end of the calendar year in which the tax obligation arose and the question of the period during which the taxpayer should draw up transfer pricing documentation was discussed.
The decision concerned a Polish company which performed specialised inward processing services for the Dutch counterparty, i.e. advertising printing on various textile, plastic and other products. There was a capital link between the entities, as the Dutch counterparty was the main shareholder of the Polish company (he owned 80% shares).
After the audit, the tax authority took the view that the prices of services set by the counterparties would have been completely different if they were not related.
According to the findings of the authority, the Polish company overstated the tax costs, thus lowering the tax revenue, while the prices used did not even cover the costs of providing the service.
In addition, the sale of the services, according to the control authority, was carried out with the exception of the economic rules for calculating the price of the object of that sale. i.e. on the conditions imposed on the taxpayer by its related counterparty.
The conclusions made after the audit led to the tax authority's assessment of the company's income for 2007 according to the net transaction margin method and the decision setting out the corporate income tax liability.
The tax authority assessed the company's income because it considered that the submitted in the course of the checks, the transfer pricing documentation shall be unreliable. According to the Authority, the reliability was not attributable to the fact that it was prepared during and only for the purposes of the investigation. The Authority also indicated that the signatures on the file belong to persons who did not perform any functions in the company during the period considered i.e. not before or during 2007
The company disagreed with the tax authority’s position, so that it appealed, and subsequently, in order to settle the case, it made a legal action (a complaint to the WSA and then to the NSA). However, the higher authorities did not agree with the company's claims. First, the Director of the Tax Chamber in Zielona Gora and then the WSA in Gorzów Wielkopolski confirmed the appropriateness of the tax authority, and ultimately the case was settled by the NSA.
According to the NSA judgment, the transfer pricing documentation prepared is not, in an unreliable manner, the tax documentation in question under Article 9a Corporate Income Tax Act.
The NSA also stressed that only a reliable and timely record of transactions between related parties could give the taxpayer the opportunity to present any circumstances which give sufficient basis to take account of the market nature of such transactions.
In the judgment’s justification, the Court also stated that the company should, without a request from the tax authority, provide evidence which is favourable to its claims, including price calculations or documents and data that would enable such calculation to be prepared.
This involves legislation Tax Ordinance the principle of active participation of the parties in tax proceedings. Such action of the taxpayer could have a beneficial effect on the authorised company and the evidence carried out by the Authority, and Next, to estimate its income for the tax year under examination.
It is worth pointing out that, as an erroneous NSA, the taxpayer's expectation that the authority will provide evidence to clarify the facts that have been established in transfer pricing documentation. The documentation is one from evidence in the proceedings and shall be assessed as any other evidence in the proceedings.
It is the taxable person who should present in the transfer pricing documentation favourable circumstances, facts, calculations, and the body has the burden of proof, so it is the authority which is required to prove that the tax income has been shown in the tax return incorrectly.
The NSA also explained that the transfer pricing documentation has, in a sense, a guarantee function for the taxpayer, as it provides an opportunity to present all the circumstances which form the basis for taking account of the market nature of the transactions recorded. It is therefore for the taxpayer to submit to the tax authorities such documentation as would indicate the valuation of the subject matter of the transaction between related parties at market price level.
The NSA has also considered the time limits for the limitation of the legal obligation and the tax obligation resulting from the determining decision. First, The NSA indicated that the tax which arises by law should be distinguished and calculated at the rate 19% according to Article 19(1) the Corporate Income Tax Act on a penalty tax of 50% specified under Article 19(4) the Corporate Income Tax Act It is important to recognise the difference between the taxes indicated to determine the limitation period under the regulation Tax Ordinance.
Obligation on the taxpayer to pay the tax at the rate 50% it is possible only after tax authorities have carried out tax proceedings to collect the necessary arrangements and data to enable application Article 19(4) the Corporate Income Tax Act The tax authorities then issue a so-called determining decision, and the tax liability arises on the date of notification of that decision.
The tax authority has a three years from the end of the calendar year in which the tax obligation arose. Consequently, in the case of service to the taxable person of a decision fixing after expiry three years since the end of the calendar year, where the tax obligation arises, the authority may not apply the penalty rate.
Another limitation period occurs where the tax authority only determines the amount of the legal liability. In this case, the tax authority has a decision to be taken and served on the taxable person five years from the end of the calendar year in which the deadline for payment of the tax will expire. The tax authority will then apply a tax rate of 19%, and the income will be determined according to the disposition Article 19(1) the Corporate Income Tax Act
In conclusion, the NSA judgment under discussion should be stressed that the tax documentation for transactions between related parties should be prepared fairly and on an ongoing basis and not only for the purposes of submission to the tax authorities on request. in the course of the proceedings. Only reliable tax records can be an effective tool to protect the rights of the taxpayer in the course of the review procedure.
It should also be remembered that there is no possibility of a decision based on Article 19(4) the Corporate Income Tax Act because of the statute of limitations, it does not preclude the definition of a tax liability in corporate income tax at the basic rate.