Repeated attempts to present transfer pricing definitions and rules which concern the documentation obligation have been made since the introduction of regulations thereon in the Polish tax law. Numerous interpretations and rulings of administrative courts often introduced additional confusion and reduced certainty due to a lack of unified positions in the judiciary. The new transfer pricing regulations come up to the expectations of the market, taxpayers and advisers as they define certain terms and introduce definitions directly to the act. The only question that needs to be answered is whether such terms are useful and accurate enough to clearly determine the transfer pricing obligations.
The new transfer pricing regulations are an attempt to clarify or give new meaning to terms which are the basis for settlements within a group resulting in numerous obligations stemming from such regulations. Many have been completely transformed, like the definition of related entities which caused a significant widening of a group of entities considered as related ones. Pursuant to the new definition, the threshold of at least 25% stake does not refer only to shares in the capital but also to instruments other than shares which determine ownership dependency. Beginning in 2019, such an instrument shall be, among others, the voting rights in controlling/management bodies, shares or rights to share in profits or assets, held participation units as well as investment certificates. The new wording was also given to the term of indirect relations or personal relations with great significance attached to the condition that a given person has the ability to influence the key business decisions taken by a given entity.
The catalogue of transfer pricing definitions was also extended by including the term of controlled transaction and transfer price which had not been defined previously in the Polish legal system. The reason for introducing both definitions was the need to minimise the doubts and difficulties in the area of interpretations related thereto. Pursuant to the new regulations, the term “controlled transaction” includes any and all business activities of which reorganisation, conclusion of a cost-sharing agreement, joint venture agreement or partnership deed are included. While the term “transfer price” is based on the importance of the financial result of the conditions determined as a result of existing relations, of which price, remuneration, financial result or ratios are included.
Special attention in the scope of terms and definitions should be paid to the new provisions referring to the nature of relations between the entities which form - for unjustified economic reasons - the structures aimed at the evasion of transfer pricing regulations. Pursuant to the new regulations, all entities participating in such a structure shall be considered as related entities in the aforementioned case.
The new transfer pricing regulations on the determination of documentation obligations introduce simplified rules when compared to elaborate formulas introduced by the legislator in the provisions which became effective on 1 January 2017.
The obligation to prepare tax documentation for transactions with related entities is imposed on taxpayers when the value of such transactions exceeds the statutory limits which are as follows:
a) PLN 10,000,000 for commodity transactions
b) PLN 10,000,000 for financial transactions
c) PLN 2,000,000 for service transactions
d) PLN 2,000,000 for transactions other than those mentioned hereinabove.
The documentation thresholds are set separately for cost- and revenue-generating transactions as well as for each transaction individually, through analysing its nature regardless of its assignment to the categories listed hereinabove. The nature of the transaction is assessed in terms of its economic effect on a given taxpayer and applicable benchmarking criteria and price verification methods.
What is important is that the amended provisions accurately determine what should be considered as value in a controlled transaction. For loans and credits - it is the value of the principal, for issues of bond - the nominal value of bonds, for guarantee - the amount of guarantee sum, and for other types of transactions - it includes other values determined on the basis of issued/received invoices, agreements, and or made/received payments.
At the same time, it was indicated that the values taken into account for determining the documentation obligations should be net values, that is reduced by the amount of goods and services tax.
The amended transfer pricing regulations provide not only for additional reporting obligations and obligatory benchmarking analyses, but also for a number of types of relief which enable taxpayers to reduce the administrative involvement in the process of preparing tax documentation.
The first and most important relief that taxpayers are entitled to - pursuant to the new regulations - is the exclusion of the documentation obligation for transactions entered between two Polish companies. The possibility of qualifying for the relief is hedged around with a number of reservations. Still, the mere fact of introducing such type of limitations offers the possible space for more effective management of the number of documents to be prepared.
The relief also applies to transactions between the entities belonging to tax capital groups as well as transactions subject to decisions concerning advance pricing agreements (APAs).
Furthermore, the legislator intends to exclude the following from the documentation obligation: transactions which do not permanently constitute revenue or tax deductible costs, and transactions with prices set in a tender procedure.
What is significant is the absence of the documentation obligation in no case exempts from the necessity of performing the transactions in compliance with the arm’s length principle. Such exemptions are only aimed at reducing the administrative involvement on the part of taxpayers and channelling the efforts to the transactions of key significance in terms of possible cross-border transfer of profits.
Katarzyna Olejnik Długaszek, Senior Manager in Transfer Pricing Team in KPMG in Poland
Jakub Roszkiewicz, Manager in Transfer Pricing Team in KPMG in Poland