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Elements of tax documentation and reporting obligations

Elements of tax documentation and reporting obligations

The new regulations of the CIT Act effective from 1 January 2019 amended not only the elements of the Local File and Master File in transfer pricing documentation but also the content of the statement and information subject to reporting

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1. The scope of elements of transfer pricing documentation

The primary purpose of the documentation prepared pursuant to the new regulations is to evidence the arm’s length character of a controlled transaction and not only to include all of its formal elements.

The objective of the amendments to the transfer pricing regulations introduced by the legislator from the beginning of 2019 is to unify the documentation elements effective in Poland with the international standards as described in the OECD Guidelines as well as to systematise them through including all the detailed information about the scope of a given type of documentation in one regulation. Such activities are aimed at, among others, reducing the taxpayers’ costs and administrative duties related to the preparation of documentation.

The most important change seems to be the introduction of the regulation defining the purpose of preparing the documentation, that is evidencing that the transfer prices in the intra-group transactions were in compliance with those that would have been set by unrelated parties.

At the same time, it should be noted that the three-tier concept of transfer pricing documentation presented in Action 13 of the Base Erosion and Profit Shifting (BEPS) has not been amended and it still provides for the following division of the documentation: local file, master file and country-by-country report.
 

Local File

Pursuant to Article 11q (1) of the CIT Act, the Local File of the transfer pricing documentation includes the following elements:

1) description of related entity
2) description of transaction, of which analysis of functions, risks and assets;
3) analysis of transfer prices (benchmarking analysis or compliance analysis);
It means that each transaction subject to documentation obligation should have the analysis of compliance with the arm’s length principle prepared, that is regardless of revenues or costs earned/incurred by taxpayers.
4) financial information
 

Master File

Pursuant to Article 11q (2) of the CIT Act, the Master File of the transfer pricing documentation includes the following elements:

1) description of the group of related entities;
2) description of significant intangible assets of the group of related entities;
3) description of significant financial transactions of the group of related entities;
4) financial and tax information of the group of related entities.

An important change is the possibility of preparing the Master File in English by another entity belonging to the group of related entities and the submission of its translation into the Polish language only upon a relevant request made by the tax authority. Yet, it does not exempt taxpayers from the liability for the compliance of such documentation with Article 11q (2) of the CIT Act.


The detailed scope of the elements of Local File and Master File which supports the taxpayers in the preparation of correct documentation was defined in the Regulation of the Minister of Finance dated 21 December 2018 on transfer pricing documentation related to corporate income tax.

Country-by-Country Reporting

The elements to be included in the information about a group of entities in 2019 have not been changed. Such issues are regulated in the regulation of the Minister of Development and Finance dated 13 June 2017 on the detailed scope of data provided in the information on the group of entities and the method of its completion and the regulation amending it dated 14 March 2018.

2. Wider scope of statement on the preparation of the Local File

For the first time, the statement on the preparation of the Local File, apart from the confirmation of its preparing, will have to include the statement on the application of arm’s length prices.

Pursuant to new Article 11m of the CIT Act, related entities that are obliged to draw up the Local File submit - to Tax Offices, by electronic means of communication - the statement on its preparation by the end of the 9th month after the end of their financial year.

In addition to the existing information on the preparation of the documentation, the statement includes a new element being the confirmation that the transfer prices in controlled transactions included in the Local File are set pursuant to the terms and conditions which would have been agreed upon by unrelated entities, that is in compliance with the arm’s length principle.

The legislator also makes the amendments in the scope of signing the statement. Pursuant to the new regulations, the statement on the preparation of transfer pricing documentation is signed by a manager of the undertaking, as interpreted in the Accounting Act, while specifying their function. When several people fulfil the criteria for a manager of the undertaking or their designation is not possible, the statement is to be submitted and signed by each person authorised to represent a given entity. What’s important is that such a statement cannot be made by an attorney.
 

3. Information about the transfer prices reported via the expanded electronic TP-R form

The obligation to report a much wider range of information about transfer prices via the new electronic TP-R form may cause a lot of difficulties.

The amendments made by the legislator include, but are not limited to, reporting the information about transfer prices via the new electronic TP-R form which replaces the existing CIT-TP form. The deadline for the submission of the TP-R form by the entities obliged to report the information about transfer prices is by the end of the 9th month after the end of the tax year commencing after 1 January 2019. The information to be reported by taxpayers via the new form includes, but is not limited to:

1) purpose of submitting the information and the period it is submitted for;
2) data identifying the entity submitting the information and the data of the entity for which it is submitted;
3) general financial information related to the entity for which the information is submitted;
4) information concerning the related entities and controlled transactions;

The taxpayer shall be obliged, among others, to evidence the category of controlled transactions they have been a party to, their value, as well as to specify the country in the territory of which business partners in the transactions have their registered offices or management. When a given category of transactions is exempt from the obligation to prepare the tax documentation pursuant to Article 11n (1) of the CIT Act, that is when the transaction is concluded between two domestic entities and with the assumption of satisfying the specified criteria, of which - among others - the criterion of no tax loss incurred by the parties, then such information should be appropriately shown in the form.

5) information concerning methods and transfer prices;

Another novelty is also the possibility of reporting the information about the selected method used to verify transfer price, transfer price applied in a controlled transaction, and the results of transfer pricing analysis as early as at the stage of TP-R form. Such an approach may cause a higher risk of transfer pricing control, especially for those transactions where the reference to the arm’s length range alone is not sufficient and it is required to present additional arguments substantiating the arm’s length character of the transactions which are included only in the documentation and cannot be added to the TP-R form.

6) additional information or notes concerning the data or information referred to in points 2-5.

As a result of the introduced amendments and when compared with the CIT-TP form, taxpayers have more work and are obliged to disclose much more information, especially the data concerning their financial result.

 

4. Summary

The new regulations are to make it easier for taxpayers to prepare correct transfer pricing documentation. A greater transparency of the regulations concerning the content of transfer pricing documentation, with the general scope of the elements included in the CIT Act, and the more detailed one - in regulations, is aimed at reducing the tax risk on the part of taxpayers. Furthermore, the legislator systematised and unified the regulations with the OECD Guidelines. Some of the major amendments are introduced in relation to the statement and the information about transfer prices as taxpayers will have to report more information.

Monika Bonikowska, Consultant in Transfer Pricing Team in KPMG in Poland
Paulina Szemiel, Manager in Transfer Pricing Team in KPMG in Poland

 

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