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Tax Alert: Draft bill on double taxation dispute resolution and conclusion of advance pricing agreements

Double taxation dispute resolution and conclusion of ad

On 22 March 2019 the Draft bill on double taxation dispute resolution and conclusion of advance pricing agreements was published on the Government Legislation Centre website.

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Tax Alert

On 22 March 2019 the Draft bill on double taxation dispute resolution and conclusion of advance pricing agreements (hereinafter: “the Draft”) was published on the Government Legislation Centre website.

The aim of this Draft is to implement the Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union (hereinafter: „the Directive”). It is also intended to ensure availability and transparency of measures to allow double taxation dispute resolution. The legislator proposes to transfer the regulations concerning advance pricing agreements (hereinafter: “APA”) that have been contained in the Tax Ordinance Act to the proposed act. Another aim of the Draft is to introduce simplified advance pricing agreements (hereinafter: “sAPA”) into the Polish legal system.

 

Double taxation dispute resolution

In the aforementioned project the legislator, in order to implement the Directive into the Polish legal system, plans to organize and increase transparency of the procedures for elimination of double taxation.

The aim of a new procedure, which was introduced to the Draft, is to improve and standardise the rules of the double taxation dispute resolution within the European Union. The procedure concerns the disputes connected with interpretation and application of agreements and conventions providing for the elimination of the double taxation of income or property that the Republic of Poland and other EU countries are parties. The Draft simplifies access to the procedure for individuals, micro, small and medium-sized enterprises within the meaning of the Directive. 

 

Advance Pricing Agreements

According to the explanatory memorandum to the Draft, the legislator does not intend to change overall concept of the APA. It is proposed to transfer the regulations contained in the Tax Ordinance Act (in Section IIA Agreements for Setting the Transaction Prices) to the Draft. The proposed act also implements changes to the procedure regarding conclusion of the APA. These amendments result from the practice of conducting such proceedings.

Most importantly, the Draft also enables foreign investors to apply for the APA already when they plan to establish the subsidiary in Poland.

According to the Draft, the Head of the National Revenue Administration is obligated to make public the aggregate information on the concluded APA and sAPA.

 

Simplified Advance Pricing Agreement

According to the Draft, taxpayers under certain conditions will be able to take advantage of the new procedure on sAPA.

The sAPA will have the unilateral nature and it will be addressed to a beneficiary.

The conditions for the application of the sAPA

In the Draft the legislator limits the applicability of the sAPA just to selected types of transactions, i.e.:

  • low value added services;
  • fees for right to use of a trademark or knowledge related to the experience gained, which could be used in industrial, commercial, scientific or organizational activities
    (know-how).

Additionally, according to the Draft the applicant will not be able to take advantage of the sAPA, if:

  • the controlled transaction was completed before the date of submitting the application;
  • the share of the applicant's income in revenue, that was earned in at least two tax years in a period of past three tax years, was lower than 1 percent.

The Draft also requires that the applicant maintains the share of income in revenues at a level not less than 1 percent for the first two years of the period for which the sAPA will be issued.

Most importantly, on-going tax proceedings, tax inspections, customs and fiscal controls and proceedings before administrative courts will not affect the possibility of the submission of application for the sAPA.

 

Required information in the application

According to the Draft, the aim of the legislator is to limit the required information in the application for issuance of the sAPA compared to „classic” APA. According to the Draft, the party applying to conclude the sAPA shall be obliged to present:

  • an information regarding controlled transaction that is to be the subject to the application, including a brief description of this transaction with the justification that the applicant needs to conclude the controlled transaction and indication of the method of setting transaction prices applied, with a brief justification for the choice and calculating the transaction price;
  • statements concerning economic justification to carry out the controlled transaction that should be signed by the managing director of an entity;
  • a brief description of economic benefits which resulted from the conclusion of the controlled transaction that is to be the subject to the application, with an indication of the types of exemplary evidences of such benefits being achieved;
  • a benchmarking study or an analysis of the compliance with the arm’s length results or a statement, that the applicant shall not prepare the benchmarking study or the analysis of the compliance, due to fact that the controlled transaction meets criteria referred to in Article 23r the Personal Income Tax Act or Article 11f the Corporate Tax Law Act;
  • proposal for the period of the validity of the sAPA.

 

Terms and fee for submitting application for the sAPA

According to the Draft, the simplified procedure for concluding sAPA should be completed within three months.

The sAPA could be concluded for a maximum period of 3 years with the possibility of renewal for next three years provided that its elements will not undergo substantial changes.

The legislator plans to implement a lump sum administrative fee of 20.000 PLN for the application for issuance of the sAPA or the renewal of the sAPA as laid down in the Draft.

 

Change of the course of the procedure concerning the APA or the sAPA

The Draft implements the possibility of changing the course of procedure concerning both the sAPA, and the APA.

If the controlled transaction, that is to be the subject to the application for issuance of the sAPA, has complex and complicated nature, The Head of the National Revenue Administration may change the course of procedure. This could be the case when the controlled transaction is connected with the transfer of the significant economic functions, assets and risks between subsidiaries, that could affect income or loss of a national subsidiary.

The course of the procedure shall not be changed in case of a transaction, that on the date of filing the application for issuance of the sAPA, was covered by tax proceedings, tax inspection, tax investigation conducted by the tax inspection authority for the period of the last two tax year or proceedings before the administrative court.

The Draft also provides for the possibility of a change of the course of the procedure concerning the APA into the procedure concerning the sAPA. This could be the case when the Head of the National Revenue Administration finds that the nature of the controlled transaction covered by the application allows for the issuance of the sAPA, and the applicant will decide to the change such procedure.

If the applicant fulfills the statutory conditions, the legislator could change the course of the procedure concerning application which was submitted before the day of the proposed act entering into force.

In the case of the transition from the procedure concerning the APA to the procedure concerning the sAPA the difference in administrative fee will be refunded to the taxpayer.

 

Amendment of Article 15e the Corporate Tax Law Act

The exemption from the limitation of the tax deductibility indicated in Article 15e the Corporate Tax Law Act regarding the transactions covered by the APA or the sAPA, will apply to the entire year, in which the application for the sAPA was submitted (before: the date of the decision) and the preceding year. It could mean in practice that the taxpayers will be able to „recover” costs which were excluded from tax deductible expenses in 2018 (in accordance with Article 15e Corporate Tax Law Act), provided that they submit the application before 2019 (assuming that they obtain the decision on the APA or the sAPA, regardless of date of the issuance of that decision).

 

The expiry of decision in the case of non-compliance with the APA or the sAPA

In the case of non-compliance with the conditions of the APA or the sAPA by the taxpayers, the tax authorities can issue a decision about their expiry. The decision confirming the expiry of the APA or the sAPA will have legal effects from the day of issue of the relevant decisions. This could also be the case should the factual situation be inconsistent with the information notified within the procedure for obtaining an agreement.

According to the Draft, the act shall come into force on 1 July 2019.

If you are interested in obtaining more information on the above described Draft, please do not hesitate to contact us.
 

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