On 28 June 2021 the Finance Ministry opened a tax preconsultation process in relation to a working paper setting out proposed amendments to transfer pricing regulations. According to the Ministry, "the purpose of the changes in transfer pricing law is to simplify a number of rules or procedures and to strip them of the bureaucratic burden".
Changes are proposed to be made to the Corporate Income Tax Act of 15 February 1992 ("CITA") and, analogously, to the Personal Income Tax Act of 26 July 1991. Incidental changes are also planned in the Taxes Management Act of 29 August 1997 and the Fiscal Penal Code Act of 10 September 1999.
Below you will find a summary of the major changes that have been proposed plus comments provided by Doradztwo Podatkowe WTS&SAJA in course of the preconsultation process:
- The transfer pricing representation (that TP documentation has been prepared and that the transfer prices used are at arm's length) will no longer be a separate document but will be part of the TPR filing – there will be a single form only.
WTS&SAJA response: We urge for abolishing this representation requirement altogether, i.e. withdraw from the proposal to include it in TPR filing.
- Benchmarking analysis (including a simplified one) will not need to be prepared for controlled transactions of taxpayers who are micro- or small enterprises and for transactions other than controlled transactions entered into by taxpayers or non-corporate partnerships with residents of tax havens.
- Taxpayers will have more time (14 days) to submit local files at tax authorities' request.
- More time to prepare the local file (until the end of tenth month after the tax year) and to make the TPR filing (until eleventh month after the tax year of the entity in question).
WTS&SAJA response: It is generally advisable to extend the deadline for issuance of transfer pricing documentation. However, given that preparing such documentation requires references to be made between transaction results and the financial statements, the 1-month extension of time will not be of major assistance to taxpayers. What may facilitate the TP documentation process is extending the time for preparing the local file until 11th month after the end of the tax year and the time for TRP-C filing until 13th month after the end of the tax year. We also urge for extending the time for preparing the master file until 15th month after the end of the tax year.
- Safe harbour transactions relating to loans, credit facilities and bonds will be exempt from the local file requirement.
WTS&SAJA response: The proposal is that controlled transactions involving loans will be exempt from the duty to prepare TP documentation if they qualify for the safe harbour provisions. We urge for extending this exemption safe harbour for low-value adding services (CITA, Article 11f).
- Transactions that involve "pure reinvoicing" will be exempt from the documentation requirement. The exemption is however supposed to be subject to a few conditions, including non-use of allocation keys and prompt settlement of the intercompany recharge between the related parties.
WTS&SAJA response: We urge for deleting the proposed provision which bars the pure reinvoicing exemption where allocation keys are used.
- The new law will elaborate on the scope of the transfer pricing analysis required for local files of non-corporate partnerships. This includes, without limitation, additional requirements relating to disclosure of the arrangements between the partners/parties regarding profit and loss sharing and interest in partnership assets.
WTS&SAJA response: We urge for having a clear provision that a simplified TP analysis will be sufficient here and for clearly indicating the threshold that triggers documentation requirements for partnerships (PLN 2,000,000 or PLN 10,000,000).
- Changes in the definition of related parties, mainly to introduce a structured approach to relations between non-corporate partnerships.
- Changes to transfer pricing adjustment requirements (CITA, Article 11e): accounting document added as documentary evidence that the related party has made a corresponding adjustment. The current requirement is that the taxpayer must hold the related party's representation about such an adjustment. The change thus extends the current range of evidence to include an accounting document underlying the corresponding adjustment.
- The new law elaborates on how to count the value of the controlled transaction in the case of a contract of deposit (capital sum) or a contract of insurance/reinsurance (sum insured) as well as in the case of the execution of a partnership agreement (total amount of contributions to the partnership).
WTS&SAJA response: Due to potential practical problems with demonstrating the sum insured (e.g. in group policies) we urge for ensuring that, for contracts of insurance/reinsurance, the controlled transaction value is computed by reference to the amount of premiums and fees, with PLN 2,000,000 being the proper documentation threshold.
- The value of the controlled transaction will be computed to ensure neutrality of VAT. Under the current law, the amount of VAT is not included in the value of the controlled transaction. The proposal is to include VAT in that value where the taxpayer is unable to recover the tax (no neutrality).
WTS&SAJA response: This change will complicate the application of the documentation requirements and will cause unreasonable differences in the scope of compliance duties between firms depending on their business profile. We recommend refraining from this change.
- New exemptions from the transfer pricing documentation requirement:
1) The exemption will apply to controlled transactions solely:
- between Polish-based permanent establishments of related parties from EU or EEA member states other than Poland;
- between a Polish-based permanent establishment of a party from an EU or EEA member state other than Poland and a related party from Poland;
- executed in a tax year during which the tax income or costs arising from such controlled transactions were attributed to a permanent establishment, on condition that neither of the related parties enjoys any of the exemptions in Articles 6, 17(1)(34) and 17(1)(34a) CITA with respect to such attributed income or costs and neither has incurred a tax loss.
2) An exemption will also apply to controlled transactions that are the subject-matter of an investment agreement or a tax agreement (this is in addition to the current exemption for controlled transactions that are the subject-matter of advance pricing agreements).
WTS&SAJA response: This change (point 1) was proposed by WTS&SAJA during proceedings of Transfer Pricing Forum's Working Group 12. We urge that this law should be further simplified by leaving only one condition for the exemption, i.e. no exemptions under Articles 6, 17(1)(34) and 17(1)(34a) CITA and no tax losses.
- Entities required to provide information on transfer prices (TPR filing) will be exempt from having to disclose contracts with non-residents in terms of foreign exchange law (form ORD-U). However, this does not apply to taxpayers and non-corporate partnerships who are required to prepare a local file under Article 11o(1) and 11o(1a) CITA.
WTS&SAJA response: We urge for extending the exemption onto transactions with tax havens as they have to be included in the TRP filing as well.
In summary, not all changes proposed by the Finance Ministry may be considered to really simplify the transfer pricing compliance burden on taxpayers. In practice, some of them may well turn out to become a hardship by introducing additional duties.
We will keep you up-to-date on the progress of this legislative proposal from the Finance Ministry. In case of any questions about our content above, feel free to reach out to our tax experts at WTS&SAJA.
