Poland: Expectations for transfer pricing-related inspections by tax authorities

Poland: Expectations for transfer pricing inspections

There are expectations that the tax authorities will focus future inspections on transfer pricing issues.

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Data and information made available by the Ministry of Finance reveal that in 2019 there were 471 inspections conducted in relation to transfer pricing—an increase of about 76% in comparison with the statistics for 2018.

  • In 2019, the number of inspections concluded with an upward adjustment increased (revealing 139 in relation to 193 inspections).
  • In 2019, as a result of inspections, the amount of the charged income tax exceeded PLN 450 million—an amount that is twice the amount for 2018.


What taxpayers may expect a transfer pricing inspection?

Experience indicates that the selection of taxpayers for inspection is based on analysis of information provided by taxpayers in their transfer pricing returns. The risk of inspection is viewed as the greatest for taxpayers that declare the conclusion of transactions (that, by their very definition, may raise doubts of the tax authorities with regard to, for example, financial transactions, service transactions or transactions linked to the gratuitous provision of services). Furthermore, the tax authorities in selecting cases for transfer pricing inspections continue to show an interest in taxpayers that:

  • Show a high dependence of income on intra-group transactions
  • Conclude significant transactions with entities having their registered offices in countries that are identified as “harmful tax competition”
  • Have a high share of costs of intangible services and financial costs in the costs of operating activities
  • Recognize a loss in a given year or repeated recognition of losses in the subsequent years
  • Show a rapid reduction of profits or lower profitability than their competitors in the industry, especially when there is a positive assessment of the undertaking’s efficiency (e.g., growth in revenues)
  • Have completed a restructuring processes


Preparations for inspection

Transfer pricing documentation—a fundamental document for an inspection—must be prepared in advance to provide information about a transaction or the functional profile of the taxpayer. This gives tax authorities significant grounds for drawing conclusions. Therefore, it is important to include in the transfer pricing documentation information that complies with the actual state of affairs. Preparation of transfer pricing documentation is a complex process, very time-consuming, and often requiring the involvement of many employees. For that purpose, it is necessary to perform a detailed review of all transactions and business events entered into with related entities and entities that are in countries identified as applying harmful tax competition in terms of their compliance with transfer pricing regulations.

Some steps to consider may include the following:

  • First, identify all business partners that are related entities or have their registered offices in tax haven jurisdictions.
  • Next, prepare a list of all transactions concluded with such undertakings, taking their value into account. Only on that basis it is possible to define transactions for which the statutory requirements to prepare the documentation are satisfied. 
  • Pay attention to the terms and conditions that set the grounds for conducting the transactions, with special emphasis placed on those that result in a loss, are not economically profitable or do not have a business justification. These will be of interest to the tax authorities. This analysis helps determine whether the transactions concluded with related entities or entities having their registered offices in countries applying harmful tax competition are justified and consistent with internal principles—that is, with the transfer pricing policy.

The next stage of preparation for a possible transfer pricing inspection would be the careful preparation of transfer pricing documentation, with special attention paid to adhering to the transfer pricing policy, concluded agreements, and the actual terms and conditions of transactions. Since 2019, certain transactions (such as restructuring arrangements) require additional efforts. An aspect of correctly prepared transfer pricing documentation is that the documentation reflects the economic terms and conditions agreed by and between the business partners to the transaction. A functional analysis or price calculation method that is not in compliance with the actual state significantly increases the risk of a challenge by the tax authorities and of a probable upward adjustment of tax.

Furthermore, the tax regulations (effective from 1 January 2019) stipulate that the preparation of the benchmarking analysis is obligatory for all entities that are required to prepare the Local file (with the only exclusion being allowed for transactions to which safe harbour provisions are applicable, provided that strictly defined terms and conditions are fulfilled). The purpose of the benchmarking analysis is to present the arm’s length terms and conditions for similar transactions through the comparison of data concerning the transactions concluded by and between the related entities and the data concerning independent entities. In view of the regulations effective since 2019, the Local file is to include the comparison of transactions showing the results of the performed analysis and justifying any deviations—so that a given transaction complies with the arm’s length principles.


KPMG observation

This information shows that in recent years, there has been an increase in the number of completed transfer pricing inspections resulting in what is seen as greater effectiveness of inspections by the tax authorities.

With the introduction of new forms and tools (such as information reporting about transfer pricing on corporate income tax and to individual income tax returns as well as the transfer pricing return itself, filed since 2019), the tax authorities have had access to detailed data concerning the transactions that taxpayers have with related entities. It may be concluded that this information enables the tax authorities to make a precise selection of entities for inspection and also improves the efficiency of the activities undertaken by the tax authorities.

Read a September 2020 report prepared by the KPMG member firm in Poland

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