Simplifications for Taxpayers in Exchange for Effective Tools for Examining and Estimating Income in Intra-Group Transactions
A significant amendment to the Corporate Income Tax and Personal Income Tax laws in Poland will come into force on January 1, 2019, which will bring rules related to transfer pricing in line with updated OECD guidelines and the Base Erosion and Profit Shifting (BEPS) action plan.
The new regulations introduce simplifications in some areas, including: (i) the obligation for transfer pricing (TP) documentation in domestic transactions will be limited to cases in which one or both related counterparties reports a tax loss or one of both counterparties benefit from income tax exemptions; (ii) value thresholds that trigger the requirement to prepare TP documentation are to be significantly increased and will depend only on the nature of the transaction rather than on the amount of revenues or costs of the entity performing the transaction; and (iii) the obligation to prepare a master file will depend on a consolidated revenue threshold and this file may be prepared and kept in English so that a translation would only be required upon written request of the tax authorities.
Other regulations which may be beneficial for taxpayers, such as “safe harbors,” will also be implemented. Under certain conditions, in relation to low value added services or intercompany loans with principal amounts up to PLN 20 million (approximately EUR 4.8 million), the tax authorities will not be entitled to assess income in intercompany transactions. The corresponding adjustment mechanism that has been used in relation to cross-border transactions will also be applicable to domestic intercompany transactions.
However, not all changes are as beneficial to taxpayers as those described above. New rules provide the tax authorities with tools for better control of, and reaction to, profit shifting. The tax authorities will have the ability to reclassify the nature of an intercompany transaction if they discover during a tax audit or fiscal control that the transaction realized between related parties is not in line with the market standard. Moreover, if the tax authorities recognize that none of the TP methods listed and described by the Corporate Income Tax law apply to the audited transaction they will have the right to use another method to estimate income, even if this method is not regulated by provisions of law. Considering the current approach of the tax authorities during fiscal controls, we cannot exclude the possibility that the above regulations will give carte blanche to the tax authorities to be aggressive in reclassification and employing “open TP method” mechanisms regardless of the OECD guidelines and common practices in transfer pricing.
The introduction of the “safe harbors” concept for low value-added services will simplify intra-group settlements, in particular, in the areas of accounting, HR, and IT. However, these types of intercompany charges are limited under the CIT law as tax deductible costs up to the annual amount of the higher of either: 5% of taxable EBITDA generated by the taxpayer or a value amount of PLN 3 million (approximately EUR 720,000). This limitation does not apply if the taxpayer has an Advanced Pricing Agreement (APA) with the tax authorities with respect to such services. Since obtaining an APA can be time consuming and costly, in the middle of 2018 the concept of a simplified APA was discussed with the tax authorities in relation to low value added services. However, further development on this concept has ceased. It may be the case that the concept of a “simplified APA” has been replaced by the “safe harbor” solution.
Over the last two years, tax reporting in Poland has become increasingly automated and now certain tax and accounting evidence, financial statements, and tax returns must be sent to the tax authorities in an electronic format or kept in XML format for tax control purposes (called “Simplified Audit Files for Tax”). The soon-to-be introduced amendments also introduce an additional reporting requirement for sending Transfer Pricing information in an electronic format. The purpose of this change is to equip the tax authorities with data for transfer pricing analysis and benchmarks, as well as for selection of taxpayers for further fiscal controls or audits.
In summary, while the regulations taking effect January 1, 2019 systematize transfer pricing and simplify the TP documentation requirements, they also give the tax authorities additional tools for combating profit shifting in intercompany transactions.
By Izabela Wiewiorka, Consultant, and Karolina Stawowska, Partner, Wolf Theiss Warsaw
This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.