On 14 November 2018 the President signed an Act amending the Personal Income Tax Act, Corporate Income Tax Act, the Tax Ordinance Act and certain other acts. One of the key amendments that will come into force at the beginning of 2019 are the new transfer pricing regulations. The new regulations repeal the Article 9a of the CIT Act regarding transfer pricing, which is being replaced by Chapter 1a, introducing comprehensive changes in this respect.
As a result of the introduction of a new definition of related parties, the transfer pricing provisions will affect a wider group of taxpayers. The threshold of at least 25 percent stake, based on which entities can be considered as related parties, will also apply to instruments other than shares that determine ownership dependency. Thus, relations will be determined e.g. by the proportion of participation units or investment certificates held, and thus the catalogue of affiliated entities will additionally include, among others, investment funds.
The new regulations also specify the issue of personal relations, indicating the condition of having an actual ability to influence legal decisions taken by the entity and thus extending the catalogue of related entities, among others, by including foundations.
The regulations also introduce a tool that gives the tax authorities the possibility of subjective assessment of the nature of relations between entities. The tax authorities will be able to consider as related parties the entities between whom there is a relationship that is not based on any justified economic reasons, including structures aiming to bypass transfer pricing regulations.
The new provisions directly oblige related entities to enter into transactions on market conditions already at the stage of setting prices. In the statement to be submitted by taxpayers, the responsible persons will be obliged to certify not only that the taxpayer possesses the transfer pricing documentation, but also that the conditions applied in transactions with related parties are consistent with the arm's length principle.
In order to confirm the arm's length nature of a transaction, the legislator allowed the use of methods other than those explicitly indicated in the regulations so far, including e.g. valuation techniques carried out by independent experts.
At the same time, in the case of transactions concerning financing and low value-adding services, which the taxpayer will carry out in line with the conditions specified in the act, the justification of the arm’s length level of remuneration will not be necessary, and the tax authority will lose the ability to assess income (introduction of safe harbours).
The new regulations also allow for reclassification or non-recognition of a transaction, i.e. a different assessment of the economic nature of a transaction by the tax authorities if the nature of the transaction does not reflect the conditions which would be agreed upon by unrelated entities. This may result, among others, in the application of a different method of the analysis of the arm's length nature of the transaction by the tax authorities. Due to the same normative content, the provision may be regarded as a repetition of the regulations concerning the general anti-tax avoidance rule (GAAR). However, due to the lack of critical conditions specifying when this provision should be used, the tax authorities will have a wider range of possibilities for its application.
The new regulations address the possibility of carrying out transfer pricing adjustments. The taxpayer will be able to make an adjustment if all the criteria listed in the act are fulfilled. The regulations indicate, among other things, the obligation to be in possession, at the time of making the adjustment, of a declaration of the counterparty on making the reverse adjustment. The adjustment may not be possible if the counterparty is domiciled a country with which Poland has not concluded a double taxation treaty or any other agreement constituting the basis of the exchange of tax information. In addition, the adjustment should be included in the tax return for the tax year to which it refers.
For the first time, the legislation explicitly defines the purpose, not only the formal scope of the transfer pricing documentation – the documentation is to demonstrate that the conditions of the controlled transaction are in line with those that would have been set by unrelated parties. The new approach is reflected in the obligation to prepare a benchmarking analysis or, in case of lack of comparable data, a simplified compliance analysis for each documented transaction.
The new provisions also introduce a change in the rules for determining the obligation to prepare transfer pricing documentation. The act repeals, among others, the obligation to document transactions between profitable Polish entities, which do not operate in special economic zones or benefit from public support granted pursuant to the Act on Support for New Investments.
At the same time, the scope of transactions subject to the documentation obligation is limited due to higher and uniform thresholds of PLN 10 million for commodity or financial transactions, or PLN 2 million for service and other transactions, excluding those mentioned above. Contrary to the regulations in force since 2017, the obligation to prepare documentation will not depend on the level of revenues or costs of the taxpayer.
Taxpayers will be required to provide information on transactions with related parties in a new form called TP-R, which will replace the CIT-TP form.
TP-R will require a much wider range of information, including the presentation of the results of benchmarking studies in a structured and specified manner. The form will also apply to local transactions which meet the criteria for excluding them from the obligation to prepare transfer pricing documentation.
The new regulations repeal the rules on the application of a penalty rate of 50 percent of income assessed for controlled transactions during a tax audit in the case of taxpayers who have not submitted transfer pricing documentation.
In accordance with the provisions of the Chapter 6a of the Tax Ordinance, the additional tax liability in the event of a decision on incorrect pricing in a controlled transaction will amount to 10 percent of the amount of overstated loss or understated income. In certain cases, the additional tax liability may double or triple, and thus amount to 30 percent.
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