The Ministry of Finance submitted for consultation a draft recommendation on the impact of the pandemic COVID-19 for transfer prices for Polish taxpayers.
These recommendations of the Ministry of Finance relate to controlled transactions where the impact of the pandemic has been identified COVID-19 for transfer prices.
The purpose of the recommendation is to provide as consistent and transparent as possible guidance on how taxpayers should plan and document transactions with associated entities under conditions of impact of the epidemic.
The document identifies several key areas: identifying the impact of pandemics on benchmarking, loss and allocation of exceptional costs, treatment of crisis support, the impact of pandemics on price agreements (APA), documentation of pandemic effects and the issue of the burden of proof.
Recommendations are quite extensive (more than 70 pages), below is a brief statement on key aspects raised in the recommendations:
Determination of pandemic impact C-19 for comparative analysis
In order to assess the impact of the pandemic, it is recommended to carry out an analysis of the industry, analyse the situation of the taxpayer, including its economic strategy and the conditions for carrying out the controlled transaction in order to determine the impact of changes on the benchmarking. Tax payers who have not felt the impact of the pandemic on their activities have analyses older than 3 Years, so out of date. They are prepared on the basis of multiannual data, as was the case in previous years.
Where a comparative analysis is made for a routine entity, it is important to determine whether the risks allocated to that entity in the risk-sharing of the transaction can materialise due to the occurrence of a pandemic and, if so, that entity may suffer losses from those risks.
The pandemic has led to operators associated with many industries being forced to adjust transfer prices to the new market conditions of the pandemic in order to preserve the market price principle. Determination of a reliable market price under pandemic conditions C-19 requires a flexible approach from both taxpayers and tax authorities. Pandemic C[19] should be treated as a material change in circumstances which may result in a subsequent non-compliance with the market price principle.
Losses and allocation of exceptional costs
The OECD Risk Analysis Guidelines should be the main starting point in determining whether and how the losses and profits that arise in the impact of the pandemic C-19 for business, they should be allocated between related entities. Allocation of pandemic effects C-19 should take into account the information available to the taxpayer on the activities of independent entities in comparable circumstances.
If during a pandemic C-19 There has been a change in the allocation of risks between the parties to the controlled transaction, it is necessary to examine whether independent entities would accept such a change and determine whether restructuring has not taken place.
Exceptional costs should be borne by the entity that performs the functions with which exceptional costs are linked or bear the risks that materialisation entails.
The inclusion of exceptional costs in the benchmarking analysis will depend on which entity the burden of these costs should be allocated. Adjustments to the accounting officer's accounting for exceptional costs are only indicated if they lead to greater comparability of the analysis.
Treatment of crisis support
Where the receipt of anti-crisis aid is identified as an economic factor, a substantial examination of the comparability of transactions should include the identification and valuation of the benefits of the support received and the sharing of those benefits between the related parties under conditions which would be determined by unrelated parties.
The impact of pandemic on price agreements (APA)
APA decisions issued remain valid during the pandemic C-19 and bind both the taxpayer and the tax authorities. Where a pandemic has led to an APA breach, it is necessary to assess the extent of the infringement and determine the possibility of maintaining the APA, of modifying the APA or repealing or terminating the decision.
Pandemic impact documentation and burden of proof
The taxpayer has no obligation to demonstrate that the pandemic COVID-19 has or has not affected the prices applied. The Impact of Pandemic COVID-19, where it is raised in the Local or Group Documentation, it should be properly documented.
Specific areas to investigate impact COVID-19
The taxpayer should examine in particular:
- - or pandemic COVID-19 has a significant impact on the market in which the entity operates?
- - whether the company identifies the impact of the pandemic COVID-19 A controlled transaction?
- In this respect, it is helpful to carry out: analysis of the economic strategy adopted by the taxpayer, analysis of the situation of the entity, analysis of the conditions for carrying out the controlled transaction;
- - Is the comparative analysis up to date?
The analysis should be updated in accordance with existing rules.
Adjustment of transfer prices
The tax authorities should not question the transfer price adjustments made for the pandemic period (e.g. in minus adjustments for 2020, in particular on condition 1 Article 11e the Corporate Income Tax Act and the Personal Income Tax Act) made only after access to comparative data for 2020 (that is, often after the submission of an annual statement).
Guidelines for benchmarking 2020 and 2021. Outcome testing approach
OECD Guidelines and Guidance COVID-19 allow transfer prices in the area two types of approach to determining transfer pricing – both ex-ante (price setting approach) and ex-post (outcome testing approach).
The OECD allows taxpayers to apply price adjustments to determine the appropriate level of market income for related parties. Especially in pandemic conditions COVID-19 The use of an outcome testing approach is desirable, and the natural consequence of allowing such an approach is the possibility (and even necessity) for taxpayers to adjust transfer prices.
Documentation and burden of proof
The need to pay particular attention to the reliable evidence of the impact of pandemics is repeatedly pointed out COVID-19 for controlled transactions and appropriate inclusion of requests in the Local File (LF) or the Master File (MF). In particular, when the taxpayer identifies the impact of the pandemic COVID-19 on a documented controlled transaction, it should objectively demonstrate this impact in local documentation.
The impact of pandemic on price agreements (APA)
APA decisions issued remain valid during the pandemic COVID-19 and bind both taxpayers and tax authorities.
Consequently, the taxpayer’s bearing on the effects of the pandemic does not automatically lead to the cessation of the APA decision and it is for the taxpayer to verify that the pandemic affects transactions covered by the APA and the conditions of the agreement in force.
In case of pandemic impact COVID-19 for transactions covered by an existing agreement, it is recommended that the taxpayer document the effects of the pandemic and address the KAS to determine whether there have been economic or business changes that may have led to material conditions, including critical conditions of APA decisions.