For public consultation, a draft law amending the Income Tax Act in terms of transfer prices was submitted. It seeks to redefine transfer pricing rules, repeals existing tax documentation rules once again and introduces new, more coherent and transparent standards. It is foreseen that a new chapter on transfer pricing will be included in each Income Tax Act.
The aim of the new regulation referred to by the authors in the explanatory memorandum is to simplify tax rules and reduce bureaucratic and administrative burdens. In this article, we present what changes are foreseen in the new draft and we try to identify the importance they have for taxpayers.
Definition of transfer price, determination of links
Time and Time first It is proposed to introduce a transfer price definition to be understood as a financial result of the conditions applied as a result of existing links.
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A new way of defining related entities was also proposed by the concept of having a significant impact on another entity.
Under this concept of significant impact, both existing capital and management-control links have been established, clearly identified family relationships have been identified, and the existence of a link will be determined by the actual ability of a natural person to have an influence on the entity's key decisions.
In the margins, it is worth mentioning that the draft amendments to the capital link indicate that such links are also generated by units and investment certificates, which means that new regulations will also include FIZs.
While remaining on the subject of links, the project also addressed the question of indirect link, indicating that such link would be created through one or more entities, which in practice would mean examining indirect links at multiple levels/levels in the structure of a group of related entities (the provision also refers to the ‘sum of indirect holdings’).
This obligation may be particularly burdensome from the perspective of local companies/entities operating in large groups which do not have such information.
In terms of terminology, it has also been proposed to introduce the concept of ‘controlled transaction’ replacing the currently existing and causing numerous differences in interpretation of the concept of ‘transactions or other events’.
one of the key proposed changes is a new way of identifying transactions subject to the documentation obligation. The project proposes moving away from the recently introduced (only applicable 1.5 (year) a system based on 2-a step-by-step study in which the size of the entities was first determined and then the value of the transaction was examined.
New way of identifying transactions subject to a documentation obligation
one of the key proposed changes is a new way of identifying transactions subject to the documentation obligation. The project proposes moving away from the recently introduced (only applicable 1.5 (year) a system based on 2-a step-by-step study in which the size of the entities was first determined and then the value of the transaction was examined.
According to the new project, the determination of the transactions for which the local documentation is to be drawn up will be based on an examination of the value of the transaction between related parties that should be classified as one of 10 the categories of transactions defined by the legislator. Proposed 2 the materiality thresholds:
- 2,000,000 PLN – for transactions in the following categories: intangible assets, services, fixed assets (including rent, lease, lease), assignment of income to a foreign establishment and other transactions
- 10,000,000 PLN – for transactions falling in categories: tangible assets, fixed assets, debt financing and guarantee.
The thresholds above should be set individually for sales and purchases.
As indicated in the explanatory memorandum of the draft, the thresholds are set separately for each transaction controlled under each category — meaning that within the one the categories will be allowed to group into types of transactions. Consequently, the values of the various transactions controlled under the one the categories should be referred separately to the threshold indicated for the category of transactions concerned.
For the purposes of setting the threshold for financial transactions, it is clear that the threshold 2,000,000 PLN the value of the financing (i.e. the value of the capital provided in the case of loans) or the value of the guarantee sum in the case of guarantees/guarantee transactions.
It was pointed out that the net value of the transaction, i.e. excluding the tax on goods and services, should be referred to all new thresholds.
It was provided that the value of the transaction should be taken into account in total the value of all homogeneous transactions, regardless of the number of accounting documents, payments made or the number of connected entities with which the transaction is carried out.
The examination should be carried out in succession on the basis of invoices, where invoices are missing, on the basis of contracts or other documents, and lastly on the basis of payments made.
The requirement to have group documentation is intended to apply only to taxable persons who operate in groups that produce consolidated financial statements in which consolidated revenues have exceeded 200,000,000 PLN.
Elements of local and group documentation
The general list of elements to be included in the tax documentation is expected to be severely reduced. Each of the documents is to consist essentially of 4 the main parts.
In the case of local documentation, these will be:
- • a description of the related entity;
- • a description of the transaction;
- • transfer pricing analysis, including: benchmarking or an analysis demonstrating the compatibility of the conditions under which a controlled transaction is concluded with the conditions that would be established by unrelated parties,
- • financial information.
For group documentation:
- • a description of the group of related parties;
- • a description of the material intangible assets of the related party group;
- • a description of the material financial transactions of the group of connected entities;
- • financial and tax information of a group of related entities.
The detailed scope of the elements of both types of documentation is to be laid down in the Regulation of the Minister for Public Finance. It is therefore still unclear how realistic the assumption of simplifying the content of tax records will be in practice.
Under the new rules, it is foreseen that group documentation may be drawn up in a foreign language, as proposed. If the group documentation is prepared in English, the obligation to translate it into Polish may be imposed on the taxable person by the authority in compliance with the time limit. 30 days from the date of service of the call. There is no reference in the provision to a situation where group documentation is drawn up in a foreign language other than English.
The requirement to have group documentation is intended to apply only to taxable persons who operate in groups that produce consolidated financial statements in which consolidated revenues have exceeded 200,000,000 PLN.
Time limits and declarations
As regards reporting obligations, it was proposed to replace the obligation for taxpayers to report CIT/TP or PIT/TP to report transfer prices electronically (TP-R). This would be the information provided by taxpayers obliged to draw up local documentation to the Head of KAS on the actual transfer prices applied.
The draft law adopted that it would continue to be compulsory to make a declaration of the drawing up of documents (signed by the persons authorised to represent the entity), with the extension of the deadline applied this year on an exceptional basis from 3 months to 9 months after the end of the financial year will become the basic rule, the time limit for submitting a declaration confirming the local drawing-up is to be 9 months after the end of the financial year.
Current deadline 7 days to submit local documentation from the date of receipt of the request from the tax authority; and 30-the day-to-day time limit for documents to be drawn up at the request of the authority to the transactions identified by the authority.
As far as group documentation is concerned, the project requires the document to be attached to the local documentation by the end of time 12-tho month after the end of the financial year. It is also a new obligation to provide the Head of the KAS with group documentation within this period, This obligation is to apply to taxpayers subject to CBC-R procedures, under the Tax Information Exchange Act with other countries.
The proposed amendment also includes the introduction of a list of transactions which will be exempted from the obligation to prepare local transfer pricing documentation. Such transactions shall include:
- - transactions between entities whose relationship arises solely from links with the State Treasury or local government units;
- - transactions the value of which, in its entirety and permanently, does not constitute income or the cost of obtaining income;
- - transactions in which the price has been fixed by unlimited tendering.
Control of transaction price after planned changes in TP
The basic rule authorising the tax authority to determine the taxpayer's income or loss is to remain in a similar formula, but it is clear that when examining market conditions, the tax authority can determine whether the related entities have not carried out the transaction in question or would have carried out another transaction in the circumstances in question.
As far as the methodology of the tax authorities is concerned, the proposed novelty is the opening of a directory of methods, because in addition to 5 so-far known in the Polish legislation, the so-called ‘tax method’ has shown that the transfer price is determined by another method, if this method results in the transfer price being determined by related parties. This other method would only be used if the application of 5 tax methods would not be possible.
The way in which the new rules are formulated has far-reaching consequences not only for the working methodology of tax authorities when verifying transactions with taxpayers, but also for taxpayers themselves when setting prices in transactions with related parties.
The solution to date is based on the assumption that the so-called "tax methods" are mandatory for tax authorities, for the purpose of setting the price at the control stage.
A taxpayer cooperating with associated entities may set prices in its transactions by any method which it uses in its business practice, and the so-called ‘tax methodologies’ serve verification purposes, the application of tax methods by the taxpayer also obliges the tax authority to apply the same method during the verification of transactions.
However, the new provisions used by the legislator in the draft legislation, ‘The related entities are obliged to set transfer prices (...)’ and then ‘The transfer prices are determined by the following methods: (...)’ means that the provision is also addressed to taxpayers.
The consequence of leaving the rules in the proposed form would be to require taxpayers to set prices by tax methods already at the stage of calculating the transaction at the time of its conclusion in any case of transactions between related parties.
This is not only a very difficult solution, but also in many cases impossible to apply in practice.
It was indicated that the most appropriate method should be used in the circumstances in question, including a different method or valuation technique, but the grounds for determining these circumstances are defined fairly broadly.
On the other hand, the use of another valuation method or technique would only be allowed if the application of any of the 5 tax methods are not possible.
It is therefore not sufficient for this ‘other method’ to be more appropriate than tax methods, it is necessary to comply with the condition that it is not possible to apply the other methods, which means the risk of long-term and complex disputes with the tax authority as to the appropriateness/inadequacy of applying the method, which is very large with such a solution.
The obligation of the tax authority to apply in principle first the order of the method adopted by the related party.
Transfer price adjustments
Another novelty is the regulation on the adjustment of transfer prices, which can be applied by the taxpayer when, during the tax year, significant circumstances affecting pre-established conditions would change. The possibility of correction is provided for taxable persons conducting transactions with both national related parties and entities from countries with which Poland has concluded agreements on the exchange of tax information, with adjustments to be made before the deadline for the submission of the annual tax return and subject to a statement from the related party to apply the correction of the same amount.
The timing of the adjustment of transfer price adjustment was also clarified by providing that such adjustment should be recorded during the settlement period concerned rather than during the period when the correction invoice was issued.
Simplified forms
The draft amending law also includes proposals for simplified solutions in which the taxpayer, after complying with the proposed remuneration framework, will be sure that the tax authority will not assess the market value. These Safe Harbour solutions apply to 2 types of transactions.
After first in the case of loan transactions, it is provided that the Minister responsible for public finances will publish a notice containing types of base rate and margins. Where, in a loan transaction with a related entity, the taxpayer applies such a rate of interest, which will be the only form of remuneration, the loan will be granted for a maximum period 5 years, the total loan liabilities will be no more than 20,000,000 PLN and the loan does not come from a tax haven, the taxpayer can ensure that the tax authority does not verify its loan agreements.
In the case of low value added services transactions, the tax authority will not verify the amount of the charge at all if it is not more than 5% costs, provided that the calculation is done by cost plus or MTN, the recipient will have a complete calculation of generic costs and a description of how the allocation keys are used for all related entities using the service).
Principles for the entry into force of the new rules
The key question in the face of such far-reaching changes is – when will they start to apply?
At the moment, the entry into force of the amending law is foreseen as of 1 January 2019, At the same time, the moment of mandatory application of the new rules was determined by the prism of revenue obtained after the day 31 December 2018 For transactions that started before 31 December 2018 and continue in 2019, in accordance with the transitional provision, new provisions should apply for that part of the transaction which is executed after 31 December 2018, which means that taxpayers would have to divide continuous transactions for the purposes of adequately describing them in the documentation as well as applying the appropriate method in accordance with the principles discussed above. New implementing rules are also foreseen, which seems necessary for the practical application of the new system, but the existing implementing rules and therefore the regulations of 2009 and 2013) would continue to apply until the new implementing rules enter into force, but not later than the end of March 2019
The proposal also proposes that taxpayers should be able to apply, at their own discretion, in part, the new provisions, in particular for the purpose of establishing the scope of the documentation obligation, already in respect of the revenue obtained after 31 December 2017