On 24 January 2018, the Minister of Finance issued a general ruling on interpreting the provisions of the Income Tax Acts (the Act on CIT and the Act on PIT) with respect to the obligation to prepare the documentation on transactions with connected entities (ruling no. DCT.8201.1.2018).
Since the amendments introduced with respect to transfer pricing documentation as of 1 January 2017 caused many doubts to be raised as to their interpretation, the Minister of Finance resolved to explain some of the controversial issues in this general ruling.
According to the provisions of law, taxpayers of CIT and PIT whose revenues or costs (in the meaning of the accounting regulations) exceeded, within the year preceding a given fiscal year, the equivalent of EUR 2,000,000.00, are obliged to prepare the documentation on transactions made with connected entities, as well as on all other events on which the conditions were agreed upon (or imposed) with these connected entities. The obligation to prepare the documentation only refers to these particular transactions and other events which significantly influence the amount of income (loss) of this taxpayer (materiality threshold).
According to Article 9a par. 1d of the Act on CIT, and Article 25a par. 1d of the Act on PIT, transactions, or other events of the same type of which the total value exceeds, in the fiscal year, the equivalent of EUR 50,000.00, are recognised as transactions or other events which have a significant influence on the amount of the taxpayer’s income (loss). The provisions stipulate higher materiality thresholds for taxpayers whose revenues, in the meaning of the accounting regulations, exceeded, within the year preceding a given fiscal year, the equivalent of EUR 2,000,000.00 (accordingly higher materiality thresholds are also stipulated for taxpayers whose revenues exceeds EUR 20,000,000.00, and EUR 100,000,000.00).
The general ruling issued by the Minister of Finance refers to four issues related to the manner of determining the documentation thresholds and the obligation of drawing up the transfer pricing documentation:
1. The manner of determining the documentation thresholds for transactions of the same type:
The Minister indicated that the definition of "transactions, or other events of the same type" used in the regulations in question refers both to the “other events” and “transactions". As a consequence, if a given taxpayer enters, with a connected entity, into transactions of the same type and the value of which exceeds, in total, the materiality threshold and, at the same time, other transactions of the same type where the value of which does not exceed this threshold, the taxpayer will only be obliged to prepare the documentation for the transactions of the same type which exceed the statutory threshold. The taxpayer is not obliged to add the values of the different types of transactions or different types of other events to determine the obligation to prepare the tax documentation. The materiality threshold determining the documenting obligation should be analysed separately with respect to each type of transaction, or each type of other event.
2. The manner for determining the documentation thresholds for transactions concluded with various connected entities:
In the issued ruling, the Minister also explained that in order to determine the obligation to prepare the documentation, the taxpayer is obliged to refer the transactional thresholds to the value constituting the sum of the values of the transactions of the same type, or other events of the same type, concluded with particular connected entities, but not to the value of those transactions of the same type with one specific connected entity. As a consequence, the value of the transactions of the same type concluded with a number of connected entities should be added together in order to determine whether the value of these transactions exceeds the statutory threshold determining the obligation to prepare the documentation.
3. The obligation of drawing up the tax documentation in the case of “other events":
According to the binding provisions of law, the documenting obligation also arises when the taxpayer records, in its accounting books, other events of which the conditions were agreed upon (or imposed) with connected entities. According to this provision, one might ask whether it refers to events implemented only with connected entities, or with non-connected ones as well. In this respect, the Minister of Finance explained in the ruling that the documenting obligation only arises with respect to transactions or other events implemented with connected entities. Therefore, if any non-connected entity is a party to a transaction or a participant in another event implemented by the taxpayer, the taxpayer will not be obliged to prepare any tax documentation.
4. Determining transactions of the same type:
The Minister also referred to the issue of the correct determination of the same type of transactions or the same type of other events which have been added together from the perspective of the statutory documenting threshold. The Minister explained that if the main parameters of the transaction, important from the point of view of transfer pricing (such as, for instance, significant functions, assets, risks, as well as the manner for calculating the price, material payment conditions, etc.) are similar to one another, then particular cash flows should be aggregated to one type of transaction (or one type of event). As a consequence, transactions of the same type and other events of the same type should be individually assessed each time with respect to the specific character of a given taxpayer. It is not permissible to artificially divide a transaction (or other event) of the same type into certain smaller ones in order to avoid the obligation to prepare the transfer pricing documentation.
The issued ruling has a protective value for all taxpayers preparing transfer pricing documentation. This means that observing the guidelines presented in this ruling and drawing up the documentation according to the principles described therein, might not result in adverse consequences for taxpayers under the tax regulations, or under fiscal penal regulations.
The first opinion preventing the General Anti-Avoidance Rule
The provisions introducing the General Anti-Avoidance Rule (GAAR), and the regulations connected with them allowing for obtaining an opinion preventing this Rule from being applied were introduced on 15 July 2016. Despite the fact that at least a dozen or so applications for issuing the opinion preventing this Rule were filed, so far, the tax authorities have consistently refused to issue any opinions by referring to the argument that the transactions described by the applicants did not exclude the possibility of applying the GAAR to them. The first protecting opinion (no. 149398/K) was only issued at the end of January 2018.
This opinion discussed the possibility of agreeing upon the additional commission due to a shop manager if certain proceeds were earned as a result of business activity carried out by the shop. Despite the fact that the shop manager was employed on the basis of a standard employment contract, the tax authority agreed that concluding an additional contract related to the shop manager’s participation in the financial result obtained by the shop managed by him would not be treated as tax avoidance. The tax authorities confirmed that this remuneration would be classified as revenue from capital proceeds which are subject to the tax rate of 19% (but not the progressive rates of 18% and 32% applicable to the taxation of revenues from employment relationships).