New transfer pricing regulations

The most painful change for taxpayers in relation to transactions with related entities that entered into force at the beginning 2018, is the limitation of the inclusion in the tax costs of expenditure on certain intangible services, royalties or guarantees charges. It covers in particular the costs of advisory services, market research, advertising services, management and control, data processing, insurance, guarantees and guarantees and similar benefits, all types of charges and charges for use or the right to use rights or intangible assets.

Introduction

Changes in transfer pricing regulations In 2017 and 2018 The following new legislation has emerged:

1. Act of 9 March 2017 on the exchange of tax information with other countries[1], which entered into force 3 April 2017 Among other things, reporting obligations on the group of entities – CbC (CbC-R) report and CbC (CbC-P) notification were introduced. Under the transitional provisions, reporting obligations (CBC-P) relate to the year starting after 31 December 2015 The range of entities subject to the obligation to prepare and report to the CbC has been extended from the reporting year beginning after the 31 December 2016;
2. Regulation of the Minister for Development and Finance from 8 June 2017 the definition of the template for the simplified corporate tax report 2 – has begun to apply 23 June 2017 A template for a simplified CIT-TP report has been introduced; the reporting obligation for CIT-TP concerns the tax year starting after the 31 December 2016;
3. Regulation of the Minister for Development and Finance from 12 September 2017 on the information contained in the corporate tax documentation 3 – entered into force 3 October 2017 New documentation obligations that apply from 1 January 2017;
4. Regulation of the Minister for Development and Finance from 13 June 2017 on the detailed scope of the data to be reported in the information on the group of entities and how to fill in 4 – has begun to apply 6 July 2017 The CbC report indicates what elements should be included.

The analysis of changes in transfer pricing also requires attention to the provisions amending existing laws contained in the following legal acts:

1. Act of 16 November 2016 – Provisions introducing the National Tax Administration Act 5 – amending from 1 March 2017 Among others, Tax Ordinance. The Head of the National Tax Administration (hereinafter: KAS) has been appointed as the competent authority for, inter alia, the issuance of decisions concerning advance pricing arrangements, hereinafter: APA;
2. Act of 9 October 2015 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts 6 (hereafter: amendment of the laws) – amending from 1 January 2017 Among others, the Corporate Income Tax Act 7 (Next: the Corporate Income Tax Act). Transfer pricing documentation obligations have been extended;
3. Act of 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals 8 (hereinafter: Amending Act 2017) – introduced from 1 January 2018 Among other things, restrictions on the inclusion of expenditure on intangible services and royalties in tax costs.

The article discusses the consequences of new regulations.

Changes from 2017

The recent years have been marked by changes in transfer pricing. From 2017 there was a revolution in the regulations on transfer prices, which aimed at adapting Polish regulations to the BEPS project[9], in particular actions[13]., specifying and harmonising the rules for documenting intra-group transactions so that tax authorities can easily identify taxpayers for control and verify the level of the transaction.

Importantly, the current 1 January 2017 provisions Article 9a the Corporate Income Tax Act (revised by the entry into force of the amendments to the laws) place a greater emphasis on proving the marketability of conditions established (or imposed) with related parties, inter alia, by the obligation to prepare analysis of comparative data. In this respect, there has also been a transfer of the burden of proving the marketability of accounts – this burden in material terms has been transferred from the tax authority to the taxpayer.

Local documentation

As a result of the entry into force 1 January 2017 amendments to the laws (changed the scope of the information to be provided in the local documentation (and. local file), formerly called ‘document 9a’. As mentioned, more emphasis has been placed on the justification of the valuation of accounts, therefore according to Article 9a(2b) the Corporate Income Tax Act the principles of remuneration calculation and the justification for the choice of the price calculation method should be described in detail.

From 1 January 2017, according to the amended wording Article 9a(1) the Corporate Income Tax Act, local documentation must be prepared by taxpayers with income or costs resulting from the accounts for the previous year above 2,000,000 EUR. This is good news for entities that do not achieve such revenues or costs.

They do not have to prepare tax documentation (except for purchases above) 20,000 EUR Each year, made with entities from so-called tax havens).

In contrast, taxpayers whose income or costs resulting from the accounts for the previous year exceed 10,000,000 EUR, The analysis of comparative data must also be included in the local documentation.

In accordance with the provisions in force, 1 January 2017 (added Article 9a(2f) the Corporate Income Tax Act) local documentation shall be drawn up no later than the date of expiry of the time limit set for the submission of the annual tax return.

10 , except that the description in question under Article 9a(2b)(3) the Corporate Income Tax Act (i.e.

a description to compare the accounts with the data resulting from the approved accounts) shall be drawn up within the time limit 10 days from the date of approval of the taxpayer’s financial statements or of a company not a legal person.

As regards the criterion of this documentation, a significant change is that, in addition to transactions having a significant impact on the amount of income (loss) of the taxpayer, other events included in the accounts have to be documented, having a significant impact on the income whose conditions have been established (or imposed) with related parties. In practice, this means that it is necessary to analyse which business events (which are not the standard sale of goods, services or financing) may be covered by the obligation to document them.

Substantiality threshold for transactions

From 1 January 2017, as a result of the amendment the Corporate Income Tax Act, the materiality thresholds for transactions for which documentation should be prepared have changed. At present, the threshold of materiality of transactions (or other events) depends on the revenues achieved by taxpayers in the previous year.

Such a relationship is aimed at stressing by the legislator that only significant transactions (or other events) from the point of view of the company's entire activities will be subject to control. Therefore, the materiality thresholds increase as the company's revenues increase.

In particular, transactions or other events having a significant impact on the amount of income (loss) of the taxpayer shall be considered transactions or other events one types whose total value exceeds the equivalent in the tax year 50,000 EUR (Article 9a(1d) the Corporate Income Tax Act).

This is the minimum threshold for materiality of transactions/events, which increases as taxpayers' revenues increase.

For taxable persons whose income within the meaning of the Accounting Act 11 in the year preceding the tax year, they exceeded the equivalent of:

1. 2,000,000 EUR, but not more than the equivalent 20,000,000 EUR – significant transactions or other events shall be considered transactions or other events one Types whose value exceeds in the tax year the amount equivalent to the amount 50,000 EUR, plus 5,000 EUR for each 1,000,000 EUR revenue above 2,000,000 EUR (Article 9a(1d)(1) the Corporate Income Tax Act), 2) 20,000,000 EUR, but not more than the equivalent 100,000,000 EUR – significant transactions or other events shall be considered transactions or other events one Types whose value exceeds in the tax year the amount equivalent to the amount 140,000 EUR plus 45,000 EUR for each 10,000,000 EUR revenue above 20,000,000 EUR (Article 9a(1d)(2) the Corporate Income Tax Act),
2. 100,000,000 EUR – significant transactions or other events shall be considered transactions or other events one types whose value in the tax year exceeds the amount equivalent to the amount 500,000 EUR (Article 9a(1d)(3) the Corporate Income Tax Act). Exceptions to the above rule are non-legal persons' contracts, joint venture agreements or similar contracts with a threshold of 50,000 EUR (Article 9a(1e) the Corporate Income Tax Act). In the case of tax havens, the threshold is 20,000 EUR – whether or not the taxable person exceeds 2,000,000 EUR revenue or costs (Article 9a(1)(2)(3) the Corporate Income Tax Act).

Increasing the capital link threshold

It is worth mentioning the positive amendment to the provision for taxpayers Article 11(5a) the Corporate Income Tax Act, Common 1 January 2017, where the capital link threshold has been increased from 5% to 25%. According to the reasons for the amendment of the laws, the intention was to exclude so-called portfolio investments from the definition of capital-related entities.

It is worth noting that it was difficult to identify having a share at the level 5% with a real possibility of influencing the behaviour of the entity (including setting or imposing conditions incompatible with the market price principle).

The increase in the proportion of the entity considered to be related constitutes in practice an adjustment to the economic reality.

In addition, the amendment extended the data resource potentially comparable for the purpose of examining the compatibility of the terms of the transaction with the conditions which independent entities would have established among themselves.

Group documentation

Another significant change, applicable to the tax year starting after 31 December 2016, is the obligation to prepare the master file. This is a dossier aimed at reducing the asymmetry of information between the taxpayer and the tax authority.

As added by 1 January 2017 Article 9a(2d) the Corporate Income Tax Act, the obligation to prepare it shall lie with taxable persons having revenue or costs resulting from the accounts for the previous year above. 20,000,000 EUR.

Such documentation is intended to allow tax authorities to familiarise themselves with the whole group, significant value-added chains and specific types of transactions such as financial transactions, intra-group services, research and development, licensing and other transactions related to intellectual property.

Tools to support the selection of control entities

From 1 January 2017 the tax authorities have been armed with additional data and tools to facilitate the selection of entities for control purposes, as well as to enable them to verify and contest settlements at the time of the tax (customs-tax) check. This is the consequence of the entry into force of the amendments to the laws and the Act of 9 March 2017 on the exchange of tax information with other countries[12].

A tool to assist the selection of control entities is the simplified CIT-TP report, submitted by taxpayers on the revenues or costs arising from the accounts in the year above 10,000,000 EUR. Another instrument, this time at international level, is the country-by-country report (CbC). The report shall indicate, inter alia: 1) where the group has its subsidiaries or foreign establishments, 2) the assets they have, and 3) How many employees are employed, as well as 4) how much tax they pay in a given jurisdiction.

Restrictions on the taxation of expenditure on certain intangible services, royalties and guarantees

The most severe change for taxpayers in related party transactions that entered into force 1 January 2018, is the introduction of a reduction in the tax costs of expenditure on certain intangible services, royalties, guarantees and guarantees (added Article 15e the Corporate Income Tax Act). In particular, it concerns the costs of advisory services, market research, advertising services, management and control, data processing, insurance, guarantees and similar benefits, all types of fees and charges for the use or right to use rights or intangible assets, transfer of the debtor's default risk for loans other than those provided by banks and cooperative savings and guarantees, including liabilities arising from derivative financial instruments and similar benefits.

According to the intention of the legislator, applicable from 1 January 2018 the limitation of the possibility of recognising as the tax cost of expenses incurred in obtaining intra-group support or the use of licences is due to the need to counter aggressive tax optimizations. Looking through the prism of maintaining a competitive balance, limiting the tools for creating a tax shield – as presented in the justification for the amending act – is a desirable procedure.

On the other hand, However, the parties which are responsible for certain functions in the group value chain may ask whether the support in the form of, for example, the use of data processing or insurance services (where the scale effect is often used within the group) or the payment for access to technology or know-how has been and is assessed as using aggressive optimization techniques. Given the common economic practice, the answer to this question should be negative.

As added Article 15e the Corporate Income Tax Act, The rules provide for the limitation of expenditure on these services and charges above the amount exceeding 5% (tax) EBITDA above 3,000,000 PLN.

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1 Journal of Laws of 2017, item 648. 2 Journal of Laws of 2017, item 1176. 3 Journal of Laws of 2017, item 1753. 4 Journal of Laws of 2017, item 1176. 5 Journal of Laws of 2016, item 1948. 6 Journal of Laws of 2015, item 1932. [7] i.e. Journal of Laws of 2018, item 1036. 8 Journal of Laws of 2017, item 2175.

9 In September 2013 OECD countries and G20 adopted a fifteen-point "Roadmap to prevent tax base erosion and profit shifting" (BEPS).

Plan specifies fifteen actions and builds on third key pillars, i.e.: the introduction of consistency in national legislation affecting cross-border activities, strengthening requirements for business substance in existing international standards, as well as increasing transparency and certainty.

10 At the time of the preparation of this publication, the Ministry of Finance’s work on extending the preparation of tax documentation was ongoing. 2017 and 2018 o 6 months. [11] i.e. Journal of Laws of 2018, item 395. 12 Journal of Laws of 2017, item 648.

13 The Ministry of Finance’s work on extending the deadline for the submission of CIT-TP to 6 months. 14 Act of 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals, Journal of Laws of 2017, item 2175.