Changes in the Provisions of Law Regarding Transfer Pricing
A draft of the amendments of the provisions regulating transfer pricing, published in July, spells a minor revolution for taxpayers. It is another significant change in this area and the pace of the modification of the regulations is best exemplified by the fact that the time limit for the preparation of tax documentation in respect of 2017 has not lapsed yet (based on the new principles) – which entered into effect this year, while the government is already proposing totally new solutions. The proposed amendments translate into a number of simplifications for taxpayers, but they also provide for new entitlements of tax authorities as regards tackling tax evasion.
The draft is in the initial stage of the legislative process and the Ministry of Finance has already announced several changes arising from public consultations. Those amendments are expected to come into effect on 1 January 2019, which means that they would apply to the documentation prepared in 2020. However, part of the provisions, advantageous for taxpayers, can be optionally applied also in the case of the documentation prepared in respect of year 2018. Below are the most important changes arising from the current version of the draft.
New definitions and materiality thresholds
The amendments provide for a totally new approach to the so-called transaction materiality thresholds which determine in which case one is obliged to prepare a relevant tax documentation. As regards local file, a departure from linking such obligation with the amount of revenues, or costs, of a given taxpayer is proposed (currently the relevant documentation is prepared by those taxpayers whose revenues, or costs, in a given tax year, exceeded 2 million EUR and who carried out transactions with related entities at the levels determined in the CIT/PIT Act), introducing a definition of the so-called controlled transaction, whose value is in the range of 2 to 10 million PLN, depending on the transaction type. Controlled transactions are to comprise all actions of commercial, capital, financial or service nature. Thus, in general, the transaction materiality threshold has been increased; currently it is at the level of EUR 50,000.
The above amendment should, on one hand, nominally increase the number of entities obliged to prepare tax documentation in respect of a given transaction and, at the same time, decrease the bureaucracy connected with its preparation. This is thanks to the increase of the materiality thresholds and the specification of examples of the transaction types, subject to the documentation obligation.
A new limit has also been suggested in respect of the obligation to prepare master file. Currently it pertains to those taxpayers whose costs or revenues exceed 20 million EUR. Once the amendments become effective, this obligation will apply to the entities belonging to a capital group whose consolidated revenues exceed PLN 200 million. What is important, taxpayers will be able to use English language versions of the document. They will be, however, required to provide a translation, if the relevant authority requires so.
Reclassification
Apart from income assessment, tax authorities will be entitled to perform the so-called reclassification of the transaction, or they may decide to disregard it in the tax settlements of a controlled entity if the tax office determines that, as a result of the existing relations, the conditions imposed between the entities differed from those which would have been agreed by non-related entities, which, in turns, results in declaring lower income or higher loss, as compared to those figures in the absence of such relations. It is a far-reaching entitlement of the authorities, similar - in its effects - to the consequences of the application of the General Anti Avoidance Rule (GAAR). It should be noted, however, that contrary to the provisions on GAAR, the proposed regulations do not provide for the principles to be followed by a given authority while performing the assessment of taxpayers' operations. It follows from the draft in question that detailed interpretation rules for tax authorities to follow will be specified in a relevant ordinance of the Minister of Finance.
The proposed solution is particularly dangerous in a situation where a tax authority fails to understand the specific nature of a given transaction, or an economic event. This can apply, in particular, to restructuring actions, whose sense should be analysed in a wider context of the result intended by the parties. In such a situation, and in individual cases, the relevant tax authority may arrive at a conclusion that non-related entities would not determine their relationship in a specific manner; this situation, however, cannot directly exclude the existence of market nature of the taxpayer’s activities.
Adjustment of transfer pricing
The proposed solution makes it possible for taxpayers to adjust the transfer pricing and treat it, accordingly, as revenue, or a revenue generating cost in the year concerned. Effective adjustment will depend on a several conditions. At first, it is necessary that in a given year, a given taxpayer - in its relations with related entities - should apply, to the best of its knowledge, such terms and conditions which would be agreed by non-related entities, while the adjustment is a consequence of new situations, the occurrence of which obliges a given entity to adjust the relations with related entities in order for them to reflect market standards. Moreover, such correction should be made no later than until the day the annual tax return is filed; additionally, the correcting entity will have to obtain, by that time, a notification issued by a related entity that a mirror adjustment has been performed. It seems that this time limit is incomprehensibly brief, therefore large capital groups, in particular, may find it difficult to adjust the transfer pricing within this three-month time limit, if necessary.
Low value-adding services and loans
The new regulations exclude certain transaction from the documentation requirement. They are low value-adding services as well as loans with an adequately agreed interest rate. Low value-adding services comprise, in particular, accounting services, as regards corporate finance and HR-related services, IT services, and others specified in the attachment to the draft, if the markup on the costs of such services is not greater than 5% of the costs in the case of their acquisition, and not lower than 5% in the case of their provision.
In the case of loans (as well as bond issues and credit facilities), a relevant authority will not need to examine whether the interest is determined on market levels, provided it is determined on the basis of a specific base rate (determined by the Minister of Finance) and the relevant margin, the length of financing does not exceed five years, and the total level or obligations, or dues, on account of the principal amounts of the loans, in relation with the related entities, does not exceed, in a given year, 20 million zlotys (the limit is calculated separately for the loans granted and taken up).
Time limit for the preparation of the documentation
The time limit for the preparation of the documentation will be extended from the existing three months to nine months, in respect of local documentation, and to twelve months – in the case of group documentation (the so-called master file).