Transfer Pricing in Poland – revolution again?
The draft amendments to CIT and PIT Acts were published on July 16, 2018. The draft legislation introduces many changes for taxpayers, specifically in transfer pricing. Some changes may be recognized as positive by taxpayers, other should be treated as a transfer pricing audits’ facilitation tool for tax authorities.
The main changes include:
- Increase of documentary thresholds for transactions covered by a transfer pricing documentation (i.e. PLN 2 million or PLN 10 million, depending on the scope of transaction). For some taxpayers, this will mean a decrease of obligations. However, some of them will lose current exemptions regarding preparation of local files and benchmarking analyzes. Following the new methodology presented in the draft, it is not the size of taxpayer but the value of transactions that determines this obligation. For example, the taxpayer with revenues or costs below EUR 2 million but concluding service transactions above PLN 2 million will be obliged to prepare not only local transfer pricing documentation but also benchmarking analysis.
- Extension of deadline for submitting a statement confirming preparation of local transfer pricing documentation and submitting an information regarding transfer prices from 3 to 9 months from the end of the tax year. The deadline for group transfer pricing documentation (Master File) will be even longer, i.e. 12 months from the end of a tax year.
- Possibility to use Master File prepared by another group entity, including documentation prepared in English. As a result, taxpayers - if they receive such documentation from the group - will no longer be obliged to prepare it locally. Only Polish taxpayers who are members of a group, where the consolidated financial statement is being prepared and where the consolidated revenues exceeded PLN 200 million in the previous year, need to have the Master File documentation. It is also important that the entities preparing both Master File and CbC Report are obliged to provide the Head of National Tax Administration with the Master File until the end of the 12th month after the end of the tax year. The purpose of this regulation is to enable the Head of National Tax Administration to receive more detailed information regarding capital groups submitting CbC Reports.
- Two new exemptions from preparing a TP documentation are being introduced: transactions, which are not considered as taxable revenues or costs and transactions, where the price is determined through an unlimited tender based on the public procurement law.
- Unification of transfer pricing requirements with OECD standards. The elements of Local and Master File are going to be changed in order to meet the OECD requirements.
- Introduction of simplified settlement conditions (safe harbors). Taxpayers may use safe harbors what should result in recognition of the transfer price as arm’s length. Safe harbors are introduced for two types of the transactions, i.e. low value-adding services and loans. However there are a few restrictive conditions limiting the use of safe harbors introduced.
- Liberalizing of the arm’s length principle. In some cases, when determining transfer prices, it will be possible to use methods other than the 5 standard transfer pricing methods, including valuation techniques.
- Transfer pricing year-end adjustments. Clear rule stating that the transfer pricing adjustment constitutes taxable revenues or tax-deductible costs and should be recognized in the year to which it applies. However there are a few restrictive conditions limiting the use of year-end adjustments introduced.
- New rules on transaction non-recognition and recharacterization. Tax authorities will gain power to consider the overall conditions of business activities conducted by related entities through the recognition that under certain conditions the transaction would not have been concluded (non-recognition) or could have been replaced by another transaction (recharacterization).
- Replacement of the CIT-TP and PIT-TP statements by electronical reporting of transfer prices (TP-R form). This will, at the same time, ensure higher efficiency in selecting taxpayers for tax audits.
- Unification of concepts and definitions. All regulations regarding transfer pricing will be included in a new chapter. Simultaneously new key legal definitions are being introduced to limit potential misinterpretations, which in the past referred mostly to the definition of a transaction.
Other positive effect of the new regulations – an increase of the threshold for the purposes of determining tax deductible costs for the services and licenses purchased from related entities (increase from 5% to 10% of tax EBITDA). However, simultaneously the limit for tax deductibility of interest cost will be decreased from 30% to 20% of the tax EBITDA.
Moreover, the amended law eliminates the controversial art. 15ca from the CIT Act.
To sum up, the most important changes are: a comprehensive approach to transfer pricing issues, implementation of OECD standards and establishment of legal definitions of terms relevant within transfer pricing regulations. Moreover, a lot of taxpayers should react positively to the change in documentation thresholds.